How the pandemic reshaped downtown Commercial Real Estate in 2021
Little by little, the pandemic influenced businesses to shift to a work-from-home environment and left business owners with important decisions to make in regards to renewing leases and relocating as foot activity reduced significantly or stopped altogether.
As a result, Toronto has seen its highest vacancy rate since the global financial crisis at 7.2% in Q4 2020, and was demoted as the crown jewel in North American office markets (position held thanks to exhibiting the lowest vacancy rate – of 3% in 2018 – the lowest level across major cities in Canada and the U.S.).
Downtown is the heart of a city’s economy and drives culture and innovation forward. Who doesn't like being downtown? Restricted or not, this aspect of the city will not change as the industry of downtown will eventually attract high performance individuals and successful businesses yet again. Therefore, businesses with plans of remaining in the market or making their place in it must take into consideration health guidelines and environmental preferences.
A large number of businesses have either transitioned to remote work and no longer benefit from leasing/owning physical space or have dissolved altogether. Therefore, commercial buildings remain available on the market for repurposing. Planning ahead for a company seeking to expand its outreach from the downtown core could be an efficient move while the pandemic is still in effect.
Current state of Commercial Real Estate
Quality over quantity is a good rule of thumb in any area of life. As the pandemic sunk businesses unapologetically during the pandemic, newer and more appealing office spaces have become available in the downtown core. In commercial terms, there are 3 classes of office buildings:
Class A – modern, 24/7 on-site building management and security, attended lobbies, efficient large floor plates, multiple elevators, modern HVAC systems, and LEED certified. This class is designed to stand out. The criteria of this class is more desirable due to the pandemic.
Class B – older, 4 stories tall on average, comfortable, elegant, but lack 24/7 security, have less amenities, fewer elevators, and are often found in suburbs or on the edge of large financial districts. This class suits businesses seeking functionality and wanting to leave an impression on their clients without emptying their pockets.
Class C – functional, older, rougher finishes, little security, and significantly less expensive than class A or B buildings. In this class, you get what you pay for as the location may not be central and as amenities are generally basic (i.e. slow elevator, narrow lobby, remote neighbourhoods).
Class B and class C buildings require a solid commitment to reinvest in retrofitting them to become a class A space. The pandemic created a shift in requirements from environmental concerns to public health concerns, mainly regarding high-quality HVAC systems and large spaces for people to interact safely in. While greenhouse emissions are no longer the main priority, they still constitute a large portion of the adaptation problem. Unfortunately, retrofitting existing buildings for their original purpose is significantly more difficult than constructing a new green building from scratch. As a result, class A buildings will be in high demand while class B and C office buildings will be repurposed for new uses.
New needs to be considered for businesses considering physical space:
- Flexible indoor spaces to enhance efficiency and comfort
- Incentivized experiences to attract workers to the office instead of working remotely
- Vast outdoor spaces for traffic to flow according to pandemic protocols
- Pedestrian, parklets, and patio to attract attention to downtown hubs
- Addressing housing opportunities and business opportunities through repurposing class B and class C buildings
Innovation and creativity can find their way in downtown commercial real estate to enhance businesses that thrived during the pandemic and that allow for housing projects to come to life in the city core.
A roadmap to transforming downtown office space
Large commercial buildings fitting this category rarely follow the same plan when it comes to retrofitting. Each municipality and business improvement district (BID) have different goals for the way they envision the building adding value to the community it is in. Here are some tools to keep in mind when assessing the value contribution:
- Flexible zoning: through use, form, signage, patio/podium restrictions, reduced parking to increasing space for people to interact in, pedestrian-only zones, and street parking conversions to outdoor dining/cafés
- Historical preservation: to avoid stymieing preservation bylaws, a tax credit would allow for investment in old buildings while maintaining the historical value of the space/building/lot
- Parking exemptions: reducing parking fees to allow for the world to recover to a manageable and welcoming level could allow for the reutilization of previous parking spaces into gyms, food production facilities, labs, and storage
- Local improvement levies: municipalities can borrow money for improvements and obtain a levy on the benefitting area to cover the debt
- Federal housing and business grants: to aid with the coronavirus recovery, the government will be providing assistance in the form of grants to enhance a wide range of business endeavours; the Ontario provincial government has attributed $23.3 B in spending towards COVID-19 business support and new grants, wage subsidies, and no-interest loans
- Permitting and inspections exceptions: development can be pushed along through LEED certification, green roofs, and green infrastructure; current bylaw standards, due to the pandemic, can expedite construction and reduce overall costs.
In conclusion, in order to initiate collaboration between city, building owners, and BIDs, mapping out the requirements of the community will set the pace for a fast-paced economic recovery in the next years. Through thinking a few steps ahead, a vast number of communities have massive opportunities to make the most out of a seemingly unfavorable situation.
Stay informed.