In the office today, at home tomorrow: The impact of a hybrid workplace on Canadian real estate

The rapid shift to remote working has helped raise Canada’s office vacancy rate during the COVID-19 pandemic. According to a February report from CBRE, the national vacancy rate for offices is up by 3.1% since the start of the pandemic. This has sparked questions about the long-term outlook for commercial real estate and the impacts of a changing world of work on other asset classes in Canada, including housing. 

There’s no straightforward answer to these questions. While we see some signs of retrenchment by office tenants, there are also many factors pointing to resilience for the sector, even if the purpose of the office and use patterns change.

Adjusting to a new world of work

Since the pandemic began, we at PwC Canada have been tracking how Canadians have been adjusting to a new world of work. At the end of July, we surveyed Canadian employers and employees about remote work and found that only one in five employees want to go back to their workplace full-time. For 63% of employees, the ideal work environment includes remote working at least half of the time.

Other studies conducted across our PwC global network, most recently in Germany, have shown similar results. Our PwC Germany counterparts found that remote work is widely viewed as a success and productivity remains unchanged or is even higher than pre-pandemic levels. As a result, 71% of employees have a strong desire to keep working from home after the pandemic (on average from two to three days a week). Our German counterparts also found tenants could see meaningful savings over a 10-year period from a 20% reduction in office space.

The latest PwC US remote working survey, which also found remote work has been a success for both employers and employees, pointed to significant change ahead for offices. Most executives (87%) expect to make changes to their real estate strategy over the next 12 months, such as consolidating office space in premier locations or opening more satellite locations. About a third (31%) expect to reduce office space over the next three years.

Rethinking the purpose of the office

Despite the success of remote work—and the fact that workers want more flexibility in their working arrangements after the pandemic—Canadian employees and employers alike aren’t looking to abandon the office. Few employers think company culture will survive in a purely remote environment, with 65% of those participating in our Canadian survey citing this as their biggest work challenge during the pandemic; they see the office as necessary to maintain morale and for collaboration and relationship building, particularly for those with the least amount of experience. And employees still want to come to the office to network and socialize.

These findings point to the emergence of a hybrid workplace where, for example, employees work from home two to three days a week and rotate in and out of offices configured for shared spaces. In building their strategies around a hybrid approach, executives are getting creative with their workspace plans as they revisit the purpose of the office in the future. For many, the goal is to make visits to the office an experience that fosters productivity and enhances relationships and company culture through design changes like collaboration hubs.

Some are assessing space needs by identifying the different types of worker personas in their organization and determining who needs to be in the office more than others. Once they’ve mapped out their workforce and where being physically present adds value, they can then plan the size and layout of their reimagined office space.

Adding to the complexity of these assessments are questions about just how much an organization can save by reducing office space. This is because, as our German counterparts found, a flexible model does involve significant costs to convert space and invest in training and technology for remote workers. Any savings will also depend on the remaining lease term and any early termination fees.

Further complicating the outlook for offices are signals that some companies will, in fact, require more space. More than half (56%) of executives participating in the PwC US survey, for example, said they expect to need more space as they increase headcount or reduce office density during the pandemic.

A turning point for Canadian real estate

These conflicting trends point to significant change ahead for offices and Canadian cities. While the outlook is uncertain, there are some key impacts we see across real estate asset classes:

Office: In shifting to serve their future focus on supporting teamwork and community building, offices will undergo significant remodelling, with hotel-type seating arrangements, huddle spaces for ad hoc collaboration and larger conference rooms with improved technology to patch in remote team members. Some companies are also looking at moving towards a hub-and-spoke model with suburban satellite offices.

Retail/services: A hybrid workplace model will have impacts on supporting businesses in office-heavy downtown areas. With fewer people possibly going to the office, we could see some retail, food and service businesses challenged and activity shifting from key central business districts (like Toronto’s underground PATH system) to the suburbs and mixed-use communities.

Residential: There’s rising demand for more spacious homes with areas for remote work. Developers and landlords, for example, are looking at amenities such as Zoom rooms where residents can have more privacy for video calls. And while we believe our major cities will remain attractive places to live, work and do business, remote working is leading to an uptick in suburbanization. Whether this is a longer-term structural trend or a temporary reaction is yet to be seen. In the meantime, it’s also boosting growth prospects of Canada’s rural areas, cottage country and some of the 18-hour cities, like Kitchener-Waterloo, Halifax, Quebec City and Victoria, that we explored in our 2021 Emerging Trends in Real Estate report.