Has the heyday of office real estate passed as more people have chosen to work from home?

Pandemic restrictions have all but lifted, but the rush to return to the office may not have been as strong as expected. Greg Bonnell tells Colin Lynch, Head of Global Real Estate Investments at TD Asset Management, Impact on office space.

transcript

Greg Bonnell: Most of the pandemic restrictions may be in the rearview mirror, but the return to the office globally has not been as robust as some expected. We speak with Colin Lynch, Head of Global Real Estate Investments at TD Asset Management. Colin, nice to have you back on the show.

Colin Lynch: Thank you for coming here.

Greg Bonnell: Alright, anyone who works in a traditional office and is in there Employees who work five or two days a week have probably noticed something. what is going on?

Colin Lynch: First of all, it varies around the world. That’s definitely true here in Canada, in much of America, and in Europe. A slightly different place is Asia. So in Singapore, Hong Kong, apart from COVID, in Tokyo and Seoul, office usage has become much more active. The same is true in places like Sydney. So let’s put Asia aside and look at North America and Europe. And yes, it was a little later than many people had originally expected.

Is the office heyday over? I argue no and yes. No, a relatively new office in a good location, well-equipped and well-connected to public transport, i.e. a new or refurbished office, is also a good green office. I think we have a great future ahead of us once we’ve worked through the dynamics of COVID and the extent of our return to the office, and understand and finalize the broader hybrid experimentation we’re all going through.

It is the low-quality office, the old office, that is, the old generation office that has not been decarbonized, where the office heyday may end. This means it is not ESG friendly and not really close to public transportation or major offices. transportation infrastructure. We think it’s going to be a theme across the globe, whether we’re talking about Canada, the UK, the US or even the stronger office market in Asia Pacific. I think that will be the theme.

And for those offices, yes, some — some of their heydays may be over. Are you investing capital to revitalize the interior space or exterior of your office, or convert it to another use? And it can get pretty expensive.

Greg Bonnell: Are there any indications as to how we are leaning towards it? As we can remember before the pandemic, some of the traditional office spaces in the heart of downtown Toronto were undergoing a revitalization. Finally, if you want to attract tenants, and in this situation workers, tell us about that interesting environment, the lucrative reasons for being there. Did you – did we see which way it fell or is it still up in the air?

Colin Lynch: yeah that’s a good question. We have seen quite a few offices pursue renewal and modernization programs. Whether it’s the lobby and creating a more welcoming environment, whether it’s incentivizing new tenants, offering what we call tenant incentives to allow tenants to build and refresh their spaces. Whether or not it’s doing a major office renovation. We’ve certainly seen it in Toronto, as mentioned above, but we see it in other cities around the country, whether it’s Montreal or Vancouver.

In particular, as the drive towards higher quality ESG offices increases, major office renovations will be required. And we’ll continue to look at that, and I would argue that it’s probably on the rise because there are a lot of older generation offices, whether in-core or out-of-core.

The conversion to multifamily housing is an interesting subject. Certainly this has been seen in some places. Australia is one of them, the UK is another. But this is seen in Canada. For example, in Calgary we have a program that the Calgary local government is trying to encourage. And they have had some success in encouraging office owners to convert their offices to other uses, usually apartment buildings. The only problem with that is, as you can imagine, it’s very expensive and not all offices are designed to work in apartment buildings. If you want

Greg Bonnell: Maybe some plumbing.

Colin Lynch: — Some plumbing, yes. Also, not all offices are built with floor plates that allow for a lot of window space. And I could see some offices that you have to do.Converting to a residential apartment would result in a very long and narrow apartment with very limited window space. tends to become

So some of these considerations are really important as they relate to the cost of modding. That’s right, plumbing, many other things, ceiling height. As such, not all offices can be converted into residences immediately. So what we call stuck, struggling to attract tenants, struggling to have alternative uses, justifying the amount of capital needed to upgrade the office to his ESG leading Some would call it stuck, struggling to get through. And those offices will have a hard time.

Greg Bonnell: I would like to talk about the economic background. Of course, one of the unknowns this year is whether there will be a recession, whether it will be deep enough to call it a recession, and what effect it will have on many asset classes. That’s it. For commercial real estate, are there two ways to think about this? What impact could a recession have?

Colin Lynch: it is. Looking at real estate versus commercial real estate, ultimately commercial real estate helps the economy. So if the economy is slowing down, it will definitely affect commercial real estate. Whether it’s a slowdown, a recession, a mild recession, or a deep recession, many can argue, but the point is slowing down a bit. So what impact will that have on the world of real estate?

So the office is really at the forefront. When an economic downturn hits, job numbers can typically stagnate and decline, so tenants start to consider their space and ask if they really need it. Because he went from 4 or 5 days a week to looking and feeling like 2-3 days a week. And many tenant occupiers are experiencing it now. So the recession may accelerate some of that thinking. There is also the view that the recession may cause more people to come to the office, but that is somewhat the opposite.

Greg Bonnell: Or maybe something like FaceTime? The economy is bad and it’s getting harder to find work. Maybe they want you to see me in the office.

Colin Lynch: yes. It’s in the realm of psychology, but certainly for the real estate industry, tough economic times continue to push more people to stay in the office to grow. There are people who are thinking Those relationships, whether it’s bosses or teammates. Historically, offices tend to be most exposed to recessionary environments, so they tend to do very well when things are growing and not so well when things aren’t.

Conversely, when we look at housing, we all need a place to live. And after all, the economy, whether recession or economic growth, is not as dynamic as demographics. So if a city is growing and attracting new people, or if people are having children later in life, if the number of married or common-law individuals is low, it means households are growing more and more. That means there will be a significant increase in demographics, and demographic increases tend to drive demand for housing. As such, housing tends to be driven by some of these demographic factors, especially in the medium to long term.

And industrial and retail are in between. They are certainly affected. Very industrial, these are warehouses, these are light industrial facilities. So when the economy gets into trouble, we will reduce the production and shipment of our products. But there’s also e-commerce, so those two should be considered, but slowing down certainly doesn’t help. And retail, uh, people are out and shopping. And we’ve seen a lot of people go out, shop, and get COVID in December. But if you don’t have much money to spend and you’re feeling pinched, it’s going to affect certain retailers. Offices are the most exposed, multi-family housing is the least exposed, with industrial and retail in between.

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