Many towers are stuck with offices
For most of my youth, I had one dream when it came to where I wanted to live: I wanted a view of the skyline. Now, through sheer dumb luck, that dream has somehow come true. Outside my window, the wall of skyscrapers that form Toronto’s core is splayed out on view.
It’s picturesque, especially when the sun hits it just so in the evenings. But that postcardlike image also hides a looming problem. Even as the skyline is populated with cranes, Toronto’s offices are increasingly empty.
As the Star just reported, vacancy rates in Toronto’s downtown jumped to nearly 13 per cent. Elsewhere it’s worse, with the national average now sitting at 16 per cent.
The reason is obvious. Despite being less dominant than they were at the height of the pandemic, remote work and hybrid work have become the norm in many companies. Businesses simply don’t need as much space as they once did.
That represents a ticking time bomb, for companies, for the real estate sector — and for cities, too.
Of course, one would expect that market forces would kick in. As companies pull back on their need for square footage, rents should drop and others should move in, right?
Instead, what is happening is that property owners are offering perks like free rent in order to prevent a downward spiral in rents — that as one expert told the Star, “as soon as they lower it, that’s it.”
Think of it as an economic stalemate: companies no longer see the need for large amounts of office space, while property owners have no way of sustainably maintaining their inventory if rents drop.
One might fairly ask: so what? But acres of empty office buildings will have a variety of knock-on effects: yes, partly, the economic shock of a downturn in commercial real estate, but also the simple fact that city centres remain the lifeblood of cities. Having them remain vacant wastelands will not only decimate the microeconomies that emerge around office towers, it will also kill cultural life by returning us to the 1980s and before, when downtowns were a place one went to work, not to play.
Something has to change. The first and most obvious solution that comes to many bright minds is office conversion. Amid an increasingly damaging housing crisis, scads of unused real estate seems like an opportunity.
There is some movement there. Calgary has an official “Downtown Office Conversion Program” with $200 million behind it that will start by converting around 2.3 million square feet of office space into residential. In typically trepidatious Toronto fashion, things are still being studied. But Coun. Brad Bradford has at least gotten the ball rolling with an initiative to see how the city is going to tackle this growing problem.
Yet office conversion is not a panacea. For one, think of your average office building from the 1990s, of which there are a lot in this country.
They tend to be designed on an open plan, and lack the plumbing, insulation and HVAC solutions necessary for segmenting a building into livable units.
One expert estimated that on average, only about a quarter of office buildings are suitable for retrofitting. That leaves plenty of 50storey towers with lots of unused space.
For those in commercial real estate, things aren’t all bad. Fancier new buildings — what is called “Class A” stock like, say, Toronto’s new CIBC Square towers — are doing fine, attracting prestigious tenants with money to spare such as Microsoft or, of course, the eponymous owners.
Where the problem lies is in the more mediocre stock lacking the prestige and facilities to draw in clients.
There, the issue is that modern companies now have different needs. Hybrid work requires flexible workspaces that can adapt based on need, as well high-end communication infrastructure.
What’s more, employees who need to be coaxed into the office may well want things like gyms, cafés and restaurants and more — things many office towers don’t have.
The idea of a massive, open-concept office that houses all an organization’s employees is long gone. The future is about adaptability, communication and wellness.
Newer builds, like Portlands Commons in Toronto’s core, attempt to do just that, including terraces, cafés and wellness spaces.
But when you’re starting from scratch, addressing the needs of the present and future is of course much easier. Tackling the legacy of the past is far more challenging. And if commercial real estate is to avoid becoming another weight dragging down an already fragile economic situation, it will have to abandon history and do something a little radical: make the office somewhere people actually want to be.