National Post (National Edition)
GHOST TOWNS
WILL HOLLOWED OUT CITIES BE ABLE TO REGAIN THEIR PRE-PANDEMIC GLORY?
The future of work and how the balance between home and office has shifted is top-of-mind for many C-suite executives. They are increasingly concerned about the decline in demand for office space brought about by the work-from-home trend after the repeated COVID-19 related lockdowns since mid-March.
Nine months later, remote working remains prevalent, and is growing in many instances as employees and companies become familiar, and increasingly comfortable, with the tech-enabled work environments that have blurred the line between home and office.
Company executives are actively looking to cut their real estate costs. Using artificial intelligence, Bloomberg LP screened just over 4,750 earnings calls over the past six months to discover one in eight corporate executives were contemplating reducing their spatial footprint. The earnings calls revealed executives' plans to slash office space, close branches or outlets, and renegotiate rents on commercial properties.
Bloomberg further reported that unlike many other investment markets that appreciated in 2020, “a global index of real estate shares has shed more than 10” per cent. In Canada, the S&P/TSX Capped REIT Index remains down 17.4 per cent year to date, compared to the broader S&P/TSX Capped Composite Index's 2.9 per cent rebound during the same period.
While demand for office and retail real estate has been declining, the same is not true for warehouses and other commercial spaces associated with retail logistics.
A gradual shift to online purchasing implies that warehouses and logistics hubs are handling more demand than ever before, necessitating the need to expand.
Whereas Amazon.com Inc.'s leasing of an additional 100,000 square feet of office space in Toronto recently made the news, a behind-the-scenes story reveals Amazon Canada is building two new fulfilment centres, one in Hamilton and another in Ajax, and five additional delivery stations also in Ontario in Kitchener, Stoney Creek, Vaughan, Etobicoke, and Scarborough, bringing its logistics centres to 16 in Canada.
At the same time, the pandemic has accelerated technology adoption. Instead of years, new tech is being adopted in months, if not sooner. Does it mean tech companies might need more space because technology sales are on the rise?
The news from Silicon Valley suggests that large technology firms are not expanding their real estate empires, at least in the short run. Pinterest Inc., a U.S.-based social media company, recently paid US$90 million to withdraw from the 490,000-square-feet lease in San Francisco.
Businesses are not the only ones in San Francisco that are economizing on space — workers are also doing the same.
Another Bloomberg report revealed that the median rents for studio apartments in San Francisco were down by 35 per cent in November from the year before. Rental markets have also softened in cities such as Boston and New York, traditionally known for their unaffordability in the past.
During the pandemic, cities like New York have been called ghost towns with hundreds of millions of office space devoid of occupancy and storefronts being boarded up even in the trendiest parts of Manhattan.
It is tempting to believe that major cities will return to their pre-pandemic glory and that COVID-19 is nothing more than an anomaly. Cities will undoubtedly remain the economic and cultural hubs, but in the post-pandemic world, they might not regain the allure they have enjoyed in the past.
It was not long ago that Detroit was one of the most prosperous towns in the U.S. and was known for its industriousness and innovation. Over time, Detroit and the automotive industry lost their competitive edge, and the Motor City first began losing prominence and ultimately faced bankruptcy prospects.
It won't be long before we know how much of the urban core's competitive advantage has been wiped out by teleworking, cloud computing and videoconferencing. The long-term impact of remote working extends far beyond the way current employees have changed their work practices. Firms can now hire talented workers worldwide and not require them to relocate to expensive cities. A new market for specialized services could emerge, feeding the demand for high-tech, yet affordable talent.
The concentration of economic activities had made cities functional, but it had also made them unaffordable and inaccessible. The pandemic has demonstrated ways to relieve pressure from cities and use the space near and around them better, resulting in a blurring of boundaries between home and work, suburbs and downtowns.
The critical question is what cities can offer to attract talent, businesses and investments, if technology is making geography increasingly irrelevant.