September 30, 2020

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Uncertain times ahead

How companies use office space and how much they require remains to be seen

KEN GIGLIOTTI / WINNIPEG FREE PRESS FILES</p><p>Right now, there is plenty of uncertainty in every industry, office real estate included. The field has been impacted by COVID-19, and over the coming months, new realities will emerge for tenants, realtors and landlords alike.</p>

KEN GIGLIOTTI / WINNIPEG FREE PRESS FILES

Right now, there is plenty of uncertainty in every industry, office real estate included. The field has been impacted by COVID-19, and over the coming months, new realities will emerge for tenants, realtors and landlords alike.

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During the first quarter of 2020, Winnipeg’s office market had a relatively strong showing. Over that stretch, nearly 130,000 square-feet of net office space was absorbed, marking the highest quarterly absorption rate in five years and more than the total amount from all of 2019.

"It’s a very good story about Winnipeg’s office market as a whole," says Ryan Behie, the vice-president and managing director of CBRE, who points to Skip The Dishes move to the newly developed True North Square as a key driver. "It’s a very good footing to have when entering a future of uncertainty."

Right now, there is plenty of uncertainty in every industry, office real estate included. The field has been impacted by COVID-19, and over the coming months, new realities will emerge for tenants, realtors and landlords alike, who will have to devise creative solutions to adapt as leases expire and corporate needs shift.

"It’s completely uncharted territory," said Ken Jones, an office and industrial tenant representative for Shindico. "The consensus is this is more of a pause (for office real estate), not a crash," he added. But in the short term, there are a number of new considerations that will arise on a company- and industry-specific basis, he said, especially when renegotiating leases.

'Maybe, there will be a decrease in demand for office space as the proportion of business done in–office decreases.'  

For one, the ways companies use office space and how much of it they require is changing at a rapid pace as each deals with the pandemic. While Behie said it’s far too early to make concrete predictions, it’s possible that as work-from-home strategies continue, companies could realize there are efficiencies in using such methods in the future, even after COVID-19 is controlled.

"Maybe, there will be a decrease in demand for office space as the proportion of business done in-office decreases," he posited. Early indications out of Asian markets show that has somewhat been the case, he said.

By the same token, however, there is a possibility that with respect to physical-distancing measures, tenants may want to allocate more square-footage to each individual employee than there currently is, he added.

Ultimately, the future office needs of many companies are up in the air and subject to change quickly, said Joe Banfield of Banfield Commercial Properties Group, which specializes in the Winnipeg office market.

Before the pandemic shutdown, Banfield said several clients were discussing potential moves or lease renewals. But by mid-March, they couldn’t say for sure what their needs would be the next month, let alone next year.

"Some clients had been saying, ‘I don’t know what I’m going to look like when this is over,’" he said.

That means tenants and landlords will have to get creative to find solutions that work for both parties, he said: a company that once thought it needed 5,000 square-feet might only need 3,000 once regular work resumes. In that scenario, the tenant might say they’ll take the full 5,000 once revenues increase, but commit to the space outright from the start.

"What this is going to do is reshape companies, and when companies get reshaped, their needs change," said Banfield, who said he was optimistic the situation would stabilize in the long term, and pointed out that there is an oversupply of office space relative to demand.

In the short term, though, questions abound, agreed Wayne Johnson, a commercial realtor who tracks local industry trends in a semi-annual report. Johnson doesn’t think the majority of downtown office users will be shrinking, space-wise, and that by and large most staffing reductions will be temporary.

According to CBRE data, vacancy rates across the city decreased between the fourth quarter of 2019 and the end of the first quarter of this year, including a nearly one per cent overall drop downtown to 10.7, and a suburban vacancy rate of 4.7 per cent, down from six.

But Johnson said as economic instability persists, those rates could suffer.

"In the next three months, looking for new office space is not likely on most people’s minds," he said.

Shindico’s Jones agreed, saying it’s likely most tenants, if they can, will look to renew leases for the time being, possibly on shortened terms, and in the meantime, sort out practical concerns like office spacing and workplace policy for when a return is deemed safe and appropriate.

Behie of CBRE said the velocity of the market has decreased since the new quarter began. However, the real impact of COVID-19 on office real estate probably won’t be fully understood for months.

He said that impact will be determined by the way the Bank of Canada, banks, landlords and tenants interact moving forward.

"This all started in mid-March, April 1 has come and gone. It’s been a challenging few weeks," he said. "May is going to be more challenging, and June more than May.

"We’re on the one-yard line."

ben.waldman@freepress.mb.ca

Ben Waldman

Ben Waldman
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Ben Waldman covers a little bit of everything for the Free Press.

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