Commercial

Toronto
Commercial

Omicron is Keeping Toronto’s Office Sector in a ‘Holding Pattern’

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Toronto’s office sector showed signs of recovery during the last couple of quarters when COVID-19-related restrictions eased, but the Omicron variant spreading like wildfire has proven a spanner in the works.

A report from Colliers noted that office leasing in Q4-2021 was particularly strong in the FIRE (financial services and real estate) and PSTS (professional, scientific and technical services) sectors. According to Jamie Jackson, Managing Director, GTA Office Practice for Colliers, the GTA’s office vacancy rate still increased by 20 basis points on a quarterly basis to 8.7%, although that was also a function of new supply hitting the market. In simple terms, however, there’s no one-size-fits-all when it comes to who will return to offices.

“The [new supply] is one reason net asking rates are staying the same and inching ever so slightly higher — there’s more triple-A product coming onto market,” he said. “But companies are hesitant and delaying their expansion criteria because they don’t know how they’re going to use that space or how much they will need in [a] hybrid environment.

“From what I’ve heard from our clients, insurance actuaries are unlikely to come back to the office, and yet agile programming teams will be coming back to the office. The other takeaway is how companies are using their space is not a one-size-fits-all.”

But now with Omicron stalling employees’ return to offices, there’s a lot of uncertainty. While tours to view potential lease space are still on the rise, Jackson cautioned those are mostly the exceptions, companies that are growing so rapidly that their long-term plans are superseded by their immediate need for space.

“The other categories are people who can’t work from home, like lab workers, etc., and category No. 3 is organizations that have had extensive experience with hybrid work and have a pretty good view of how they will move forward,” he said.

However, one thing is for sure: Omicron is delaying companies’ leasing commitments until they can physically test the hybrid work model in their current offices to determine future needs.

Although it is too early to ascertain how Omicron will affect office demand through the first half of the year, Keith Reading, Director of Research at Morguard, says the latest COVID wave is inauspicious because it has jarred business confidence.

“Prior to the Omicron spike, there was a little bit of optimism building and companies were planning on going back to work. Just when there was a little bit of light at the end of the tunnel, we get hit with Omicron and it will delay people’s plans to go back to work,” he said. “Business confidence taking a hit is absolutely the biggest factor, because if businesses are confident they tend to look for opportunities, they look at their business lines and expanding or maybe relocating to nicer office space or hiring staff as a result of being confident in their revenue outlook, but this public health issue really throws a wrench in the works.”

Reading describes Toronto’s office market as returning to a holding pattern in which some companies are shelving hiring and growth plans. In other words, they’re taking a wait-and-see approach, especially because there’s scant reason not to expect another disruptive COVID-19 variant after Omicron.

“It’s the lack of leasing activity. There’s activity out there, but it’s not what we would call real growth, which is companies expanding their businesses,” continued Reading. “It becomes harder to gauge when your work force is not in the office.

“I think what you will see is more users are looking at this now and saying, ‘Here we go again. It’s worse in terms of infection rates and this could keep happening.’”

Jackson, however, believes business confidence is still robust because fundamentals in the general economy are still holding strong, and in Colliers’ case, Jackson says many clients’ businesses are, in fact, growing thanks to that fundamental economic structure.

“There’s uncertainty around how much space they might need and how they’ll use it, but that’s more a question about logistics than whether or not real estate will be part of their business,” he said. “Real estate will continue being a tool to help companies grow their businesses. It’s just a question of what that will look like in the future and how much space they will need per employee.”

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