Reimagining and Reworking Office Space in Canada - Winnipeg Edition

Downtown cores across the country continue to face the residual effects of the widespread lockdowns during the course of the pandemic, which prompted many companies to rapidly shift their workforce from downtown offices to working from home.

This has certainly caused a disruption to the traditional office workplace as we once knew it, and it’s safe to say that today’s workforce could never have imagined or predicted this current scenario. As many companies have successfully shifted to a hybrid work from home model – a model that most agree is likely here to stay – this has left many wondering, especially those in the commercial real estate sector:

What will become of the office class?

We have turned to our teams in Toronto, Ottawa, Winnipeg, Edmonton, and Calgary to break down just how this asset class has changed in their respective cities and share their predictions for what they believe is to come for the future of this class that has traditionally dominated much of the downtown market in Canada’s larger centres.

Winnipeg

In Winnipeg,?Andrew Loewen, senior mortgage underwriter at Canada ICI, predicts suburban office space will become more in demand over the coming years and that small businesses will rent space closer to where people live; reducing commute time, traffic, and parking costs.

“Businesses are now realizing they don’t need to have office space for every person within the company,” says Loewen, “and leases will likely be cancelled or not renewed as a result.”?

In Winnipeg, the city is starting to see this fallout already, as the downtown office vacancy rate went up in the third quarter of 2021 to 14.6 per cent as per the 2021 CBRE Q3 report.

This is, however, in part due to?one of the country’s largest insurance providers,?Canada Life Assurance Company,?not renewing their nine-floor lease; leaving behind in their wake 120,000 sq. ft. of vacant office space in the downtown core. On the flip side however, Harvard Developments is?renovating the concourse and lobby of 201 Portage, and the opening of True North Square also stands out as a major highlight for the market.

The office is set to four towers and over one million square feet of office, residential, retail, hotel and public space. The first tower, a 17-storey Class A office building, opened in June 2018 and is nearly fully occupied.

In the meantime, many office landlords are adapting in other ways; spending substantial amounts of money to improve their buildings, or trying to obtain new designations such as a?WiredScore Wired Certification, which assesses the digital connectivity and smart technology within a building.?

“The general speculation is that the office asset class will continue to hurt for a while longer as Winnipeg has substantial supply and a smaller demand for new space,” says Loewen.

Loewen adds that he believes the lower office class spaces in particular, will be hurt the most, as higher-class office spaces will continue to lower rents and incentivize tenants, drawing them away from older, dated office spaces and into newly renovated or developed spaces.

However, he remains optimistic, noting that the strong push for back to work from the government has seemed to have helped the Canadian office market.?

And as Loewen simply puts it, “The more people that are downtown, the more people will need to be downtown and that will drive demand.”

Higher-class office spaces [in Winnipeg] will continue to lower rents and incentivize tenants, drawing them away from older, dated office spaces.

Read the full report on?CanadaICI.com

Key Terms:

CLASS AA?

A best-in-class office product, with more elaborate common areas, modern construction and building efficiencies, that commands the highest rents and tends to attract stronger covenant tenants, such as banks, government, insurance companies, etc. These buildings tend to be situated close to the core within their respective markets and have excellent access to major public transit hubs. Buildings are typically larger than 750,000 sq. ft., with 5 to 10-year tenancies and some 15-year leases for inbound tenants. Occupancy levels assumed to stabilize at close to 95 per cent of comparable market net rates.?

CLASS A?

A strong-performing asset, typically between 400,000 and 700,000 sq. ft., which is well located, and may have smaller floor plate sizes, solid amenities and less elaborate common areas. The majority of the tenants have 5 to 10-year lease commitments. Occupancy levels assumed to stabilize at close to 95 per cent of comparable market net rates.?

CLASS B?

Older office product, typically in the range of 100,000 to 250,000 sq. ft. These buildings tend to be occupied with a diversified tenant mix but lack a large anchor tenant. Shorter lease commitments occur in this asset class with the average term ranging between 5 and 10 years. Average floor plate size can be significantly smaller.

Source: Cushman & Wakefield

Disclaimer:

Any statements made by Canada ICI that are forward-looking may include assumptions regarding projections and expectations regarding: market trends in the office asset class nationally, and more specifically, in the local markets where we operate. While we consider these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties which are beyond our control and could cause actual results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The information presented has been obtained from sources we believe to be reliable; however, Canada ICI cannot make any guarantee regarding the accuracy or completeness of the information provided.