Autos are king for some city commercial real estate

Once the object of corporate desire, highend commercial real estate in the urban core continues to lose its lustre under COVID-19, particularly in transit-oriented downtowns.

Evidence of the downturn started with anecdotes of rising vacancies and low levels of physical occupancy in centrally located offices. Even when lockdown restrictions were lifted and public transit could fully operate again, commercial real estate in the urban core continued to struggle.

In a paper released in January, Stuart Rosenthal, a professor at Syracuse University, and co-authors (including William Strange, a University of Toronto professor) questioned whether city centres are losing their appeal.

Their empirical analysis of 56,765 commercial leases signed between January 2019 and October 2020 across 109 urban centres in the United States revealed that commercial real estate in the urban core, especially in cities where public transit accounts for a sizable share of work trips, has indeed lost value.

Their nuanced findings confirm what industry watchers have observed since the onset of the pandemic: Commercial real estate in cities that “rely heavily on subway and light rail” has been affected more by the adverse impacts of COVID-19 than cities where commuting is dominated by the automobile.

The authors caution that these trends do not suggest that downtowns are done for — far from it. The analysis revealed that businesses, even since the onset of the pandemic, have been willing to pay a premium for commercial real estate in the city centre and near rail-based public transit.

The paper shows transit cities reported a higher density of employment in the urban core, reflecting businesses' preference for central locations. On the flip side, commercial rents declined faster in transit cities than it did in auto-centric cities as the distance from the city centre increased. Furthermore, “COVID-19 reduced the value of density by 21 per cent” in transit cities.

The authors said COVID-19 does “weaken” city centres, but they still remain attractive, and the weakness is only in the largest and most dense cities.

There are only three urban centres in Canada where public transit accounts for more than 20 per cent of work trips: Montreal, Toronto, and Vancouver. Just behind them is Ottawa-Hull, where almost 19 per cent of work trips are made on public transit.

Downtown Toronto constitutes the country's largest employment hub, with almost 500,000 pre-COVID-19 jobs packed tightly in a small space. Neither downtown Montreal nor Vancouver is as large and dense as Toronto, yet both are still bona fide large employment hubs.

Canada's downtown-centric employment hubs have grown because public transit has provided fast and reliable access to and from the city centres. For instance, an overwhelming majority of workers who travel into downtown Toronto during the morning rush hours do so by public transit. Take public transit out of the equation, and the downtown real estate dominoes start to collapse.

A May 2020 report by Ryerson University's Urban Analytics Institute noted that employment hubs in the urban core now face three distinct challenges.

First, telework will continue beyond the pandemic, with knowledge economy employees working from home, even if only part-time, at rates higher than those before the pandemic. Second, public transit throughput capacities have been impacted by physical distancing restrictions that limit the number of workers who can access downtown locations. Moreover, post-pandemic floor layouts will accommodate fewer workers in the same space because of physical distancing requirements.

This trifecta of challenges will impact commercial real estate prospects in the urban core more than elsewhere, so the recovery might be more pronounced and robust in auto cities than in transit cities.

Nevertheless, those looking for evidence for the death of downtowns will have to look elsewhere. The city centres are down, but not dead. Yes, COVID-19 has weakened cities, but it has not eliminated the appeal of downtown employment hubs.

PETER J. THOMPSON / FINANCIAL POST A pedestrian walks through a largely empty Dundas Square in Toronto this week. A recent study has suggested that while commercial real estate in big cities has been affected by the pandemic, it should be far from being counted out.