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MAY/JUNE 2022 BCBUSINESS 35 BCBUSINESS.CA O U T O F O F F I C E The forced dispersal of non- essential workers in the opening months of the pandemic must have left a pit in stomachs of office landlords—perhaps all the more so once it became clear that a great many people could, in fact, do their jobs from home and that economic activity would stagger on. By August 2020, a KPMG survey of 500 CEOs in 11 countries showed that 69 percent intended to downsize their office footprint. Even as of April 11, commercial real estate firm Avison Young's Vitality Index, which measures the foot traffic in North American city centres compared to March 2, 2020, was down 57.4 percent in Vancou- ver. Toronto was at –73.3 percent and Ottawa a ghost-town-like –77.9 percent. And while Calgary and Edmonton looked relatively unscathed at –50.7 and –40.9 percent, respectively, that's because the collapse of oil and gas prices since 2014 had already left their downtowns one-quar- ter vacant going into 2020. The Vitality Index is an accu- rate snapshot but a lagging indi- cator, Avison Young's research team cautions. For a sense of what's to come, look at leasing activity, and for downtown Van- couver, at least, it's brisk. The firm expects an uptick in the city's vacancy rate due to the completion of four new buildings totalling a million square feet over the fall and winter, but the net absorption of space has turned positive. And though a pandemic-related aversion to public transit and elevators continues to inf luence workers' return-to-office readiness in the city core, COVID-related vacancy barely registered in the suburbs. Indeed, when KPMG polled CEOs again last spring, this time only 17 percent said they were going to trim space. "There's starting to be a consensus that there will be an office centricity in most cases," says Wendy Waters, vice-president, research ser- vices and strategy, for GWL Realty Advisors. And while perhaps 10 to 20 percent of office denizens pre-pandemic may never return, other factors are continuing to drive job cre- ation in cities including Vancouver. "Office-oriented jobs were growing much faster than non-office jobs, especially since 2016," Waters says. Technology has been an obvious driver, but so have finance, educa- tion, natural resources and other sectors. In fact, the number of office jobs in Vancouver as of August had grown 6.9 percent in the previous two years, COVID-19 notwithstand- ing. So it's only a matter of time before the workstations left empty by employees stay- ing home get filled by new recruits. "The downtowns I'm not too worried about over a five-year horizon. I think by then they will look remarkably similar to 2019," Waters predicts. Energy-efficient green buildings, those with good air qual- ity and sought-after amenities, will be best able to maintain their rents. Waters points to GWL's own Vancou- ver Centre II tower, which is being built to LEED platinum standards, with radiant heat and cooling such that the air being blown into offices is 100-percent fresh and free of virus-bearing aerosols. There will be a roof- top deck accessible to tenants and even a dog run; the entire building, anchored by tenant Kabam Games, will be pet-friendly. Should the vacancy rate, now up to between 6 and 7 percent (a balanced market, by his- torical standards), rise further, it will be older B- and C-class space that could see lease rates erode. J U S T W I N D O W S H O P P I N G Retail was another segment of the real estate sector to feel the chill of lock- down. Canada's largest retail-focused real estate investment trust, RioCan REIT, saw its market value cut in half between mid- February and mid-March 2020. Ivanhoé Cambridge, operator of Tsawwassen Mills, Metropolis at Metrotown, Guildford Town Centre and Victoria's Mayfair Shopping Centre and owned by the Caisse de dépôt et placement du Québec, reported a nega- tive return of 15.7 percent in 2020 and wrote down the fair value of its real estate assets by 9.3 percent. The outlook is somewhat sunnier now as, even in laggard Ontario, the malls are open. Of greater concern to shopping cen- tre and high street landlords is the growth spurt the pandemic bestowed upon already burgeoning e-commerce and meal delivery operators. Once your parents start order- ing from Amazon and SkipTheDishes, part of that business could be lost forever to the storefront operator. There are exceptions to the carnage, of course. Grocery-anchored shopping centres actually saw an increase in per-square-foot sales as disposable income formerly spent on restaurant meals got redirected to the kitchen, notes GWL Realty's Waters. Street- front and outdoor mall locations found they could easily adapt to curbside pick-up. How durable the trends favouring these property types will be, however, is open to question. On a relative valuation basis, now may be a better time to invest in discounted indoor shopping environments with at least the potential to get back to business as usual. "There's starting to be a consensus that there will be an office centricity in most cases....The downtowns I'm not too worried about over a five-year horizon. I think by then they will look remarkably similar to 2019" Wendy Waters, vice-president, research services and strategy, GWL Realty Advisors R E I N V E N T I O N O R R E A R G U A R D A C T I O N ? Last August, Cadillac Fairview, owner of Pacific Centre and Richmond Centre, among many retail properties across Canada, announced the rollout of home delivery services CF Eats and CF Delivery, as well as ReturnBear, a single mall-front depot where shoppers can return items from multiple stores. The mall landlord, owned by the Ontario Teachers' Pension Plan, aims to help its tenants compete with e-commerce operators and provide a "frictionless shopping experience" for consumers. –M.M. R E A L E S T A T E I N V E S T M E N T G U I D E 2 0 2 2