The effects of the pandemic have been pervasive across all sectors, but there is no denying that COVID-19 has intrinsically changed the way the real estate industry operates.
When the pandemic disrupted the world, there was an understanding that everyone working at home would want to continue doing so once it was over. Nevertheless, as the months have dragged on, our basic human need for social interaction is coming to the fore, and many workers are eager to return to the workplace in some capacity.
The demand for office space has changed.
Behaviours have shifted, and the new normal office space will likely be a hybrid one. Health considerations will mean businesses will need more space per employee, but fewer employees will likely be in offices on a daily basis.
The in-office demand now is for flexible, reconfigurable floor plans, indoor air quality, touchless technologies and appropriate distancing between office cubicles. Some businesses are going for a blended remote and in-office model.
There is continued uncertainty about the extent to which many employees will bring back their staff. Face-to-face interaction is necessary for hiring, integrating entry-level staff and for building organizational culture.
While remote work is productive for many, it’s not a sustainable practice for all. 37% of employees want to be in the office for most of their working hours, with the remaining 29% looking for an even split between the two options.
How are these changes affecting Victoria’s commercial real estate market?
Flexible Leases
The pandemic is heightening demand for more flexible arrangements, including short-term leases.
“Tenants whose leases are up for renewal are considering shorter terms to enable them to navigate what their requirements will look like in the next 18 to 24 months before committing to a longer term. For this flexibility we have not experienced downward pressure on rents. Traditional office users expect that they will continue to occupy office space and want the time to determine what that will look like,” says Gail Reaney, Vice President of Colliers Victoria.
The office market in Victoria has been relatively stable throughout the pandemic, even though there was a marked pause on decision making with regard to renewing or expanding. Rates haven’t wavered or increased. The stability is owed to the Federal/Provincial Government/Crown Corporations being the largest tenant of many commercial real estate brokers in town (occupying roughly 50 percent of downtown core real estate), and they retained much of their space through the pandemic.
Will the pandemic ignite interest in suburban office development as many employees seek to work closer to home? It’s already started, most notably in Langford, Saanich and View Royal.
“There already was an interest in suburban office before COVID-19, as evidenced in part by increasing occupancies in newer buildings in Saanich and View Royal. While it is still too soon to say, the pandemic may very well act as a catalyst toward further suburban office development,” notes Tim Sommer, Senior VP, Cushman & Wakefield Victoria.
The fact, however, remains that “with no new office developments having been completed in 2020, the increase in downtown vacancy directly translates to approximately 130,000 sq. ft. of vacant office space in the downtown core that wasn’t vacant a year ago,” says James Murray, Representative, Leasing and Sales for CBRE Victoria.
There is some good news.
“Overall, it’s still unclear whether or not demand for office space downtown will increase again following a full roll-out of COVID-19 vaccinations in BC, but we have seen a recent uptake in interest from tenants in numerous sectors, including tech and professional services,” says Murray.
Retail evolution
Most retail properties have needed to evolve as they shift to an e-commerce model.
“We have seen a pivot by restaurants owners to offer grocery items. Fitness has pivoted towards scheduled workout times and away from drop in. Smaller retailers are successfully moving towards online channels in an effort to increase sales,” says Jeff Lougheed, Senior Associate, Commercial Sales and Leasing at Cushman & Wakefield.
Some retails spaces may eventually be converted: “We may see some core, downtown retail converted to last-mile industrial or service office, but it’s less likely in the suburbs, where retail supply is limited.”
As some tenants are looking to negotiate new arrangements, including full conversion to rents based on percentage of sales, grocery retail has remained stable in Victoria.
“Appointment-based and grocery-anchored retail has been stable, if not outperformed, and we’re seeing increased demand from both segments as well.”
There’s also been an increase in interest in the suburbs. “We’re seeing increased investor interest in acquiring retail properties, especially in the suburbs,” says Lougheed.
Overall, the retail sector isn’t doing as badly as we may think.
“In the first quarter, we saw an overall increase in tenant activity – retailers and restaurants exploring options – and franchise development and expansion, and we only expect that to accelerate over the course of the year. Similarly, we’re seeing increased investor interest in acquiring retail properties, especially in the suburbs.”
Adapting Industrial Spaces
Industrial real estate has stayed adaptable through the pandemic since there has been an increased in demand from e-commerce, food delivery services, home improvement retailers and medical supply companies.
The biggest issue for clients is acquiring high-quality distribution space to facilitate e-commerce. Redundant retail space could be repurposed into industrial uses to help with last-mile delivery and overall fulfillment and distribution.
Overall, the downtown core of Victoria has a lot to offer businesses and many commercial realtors are optimistic those businesses will return. Although a lot of office development is currently growing in suburban markets – Langford in particular – realtors are confident that businesses will occupy downtown offices again soon.
There is a sense of hope amidst the uncertainty.
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