Pandemic sparks blizzard of change across CRE industry
No matter when it ends, the effects of the COVID-19 pandemic on commercial real estate will be far-reaching and long lasting, according to a group of industry professionals speaking during a recent webinar hosted by the Urban Land Institute and PwC.
“The good news is that the pandemic has showed us that we can all quickly adapt and innovate, especially in working remotely,” said Altus Group data operations vice-president Ray Wong. “COVID-19 has and will fundamentally change the way we interact with real estate.”
Wong noted investment activity is down 20 per cent this year compared to 2019, there have been delays in leasing and the amount of sublet office space on the market has increased.
Oxford Properties Group chief financial officer and executive vice-president of finance and strategy Alison Wolfe said increased online shopping and curbside pick-up will affect relationships between shoppers, retailers and landlords.
“Where we live may change,” Wolfe added. “We’re seeing an increasing number of people moving away from the extreme density of urban cities to locations that are more open” and there’s a different quality of life.
“We used to value living in the hot urban centres around the action, but those values seem to be shifting.”
The biggest impact, according to First Gulf chief development officer and vice-president of development Renee Gomes, should be the acknowledgement that “unpredictable disastrous shocks are going to happen, and they’re not all going to be pandemics, and it’s not going to be another 100 years before the next disaster happens.
“In order to have our best shot going forward and responding to these kinds of shocks, we really have to pivot toward building truly resilient cities. Prior to COVID, there was a growing awareness, but perhaps not quite a full understanding of, what building resilient systems and communities really means.”
Pandemic affects construction industry
EllisDon president and chief executive officer Geoff Smith said there was a 20 per cent decline in construction productivity during the first wave of the pandemic, which affected project scheduling.
Smith thinks the ongoing second wave’s impact will be worse, noting there had been more COVID-19 cases on the construction and building services company’s sites in the previous six weeks than in the previous six months. He believes labour shortages due to COVID-19 could shut down entire construction sites.
Smith is also worried about general sub-contractor and tradespeople shortages, noting thousands more are needed to deliver projects, which could “affect supply at a time of reasonably strong demand.” A drop in immigration this year, due to the pandemic, has been a contributing factor to the lack of tradespeople.
“We can put these people to work as quickly as you can give them to us,” said Smith. “The unions would say the same thing. We’ll train them, we need them and it stimulates demand as well.”
Smith noted supply chains have been affected and that Toronto had experienced an unexpected pandemic-related concrete shortage.
Smith said there may be short-term construction cost relief for developers, but the consolidation already happening in the construction industry will accelerate due to COVID-19 and will likely make costs rise.
Changing development strategies
“On the residential side, we’ve already been including high-quality co-working spaces as part of our package,” said Wolfe, but Oxford is reconsidering unit sizes, layouts and space allocations to accommodate more convenient remote working.
The real estate investment, development and property management company is also looking to try to include more outdoor elements via balconies, terraces and amenity spaces.
Gomes said First Gulf — with expertise in development, construction, leasing, finance and property management — is doing the same. That includes shifting from completely open-concept spaces to those that allow people to close a door for more privacy.
Wolfe said retail is moving away from traditional merchandising strategies and fashion tenants to more alternative uses, including medical, education and wellness.
There’s a need for more studio space for film, television and streaming services companies, as Wolfe said there’s increasing demand for more home entertainment.
Wong said small-bay industrial is being negatively impacted, which is related to the types of tenants that generally use those facilities, including hospitality and niche retail. Those sectors have been harder hit by the pandemic than others.
Cold storage facilities and data centres are growth areas, according to Wong. He said intensifying existing sites to increase synergies and value will also become more prevalent.
Smith said existing commercial and industrial spaces are becoming data centres, empty warehouses are becoming last-mile logistics facilities and shopping centres are being repurposed to multiple uses.
Working from home, offices and the pandemic
Panel moderator and PwC Canada managing director of real estate and consulting leader Miriam Gurza said just 30 per cent of Ontario office employees are comfortable with returning to the workplace.
Gomes thinks some jobs may become completely remote, while she also expects more flexible work arrangements with people splitting their time among different locations. This could mean fewer employees in offices with lower densities, so there may not necessarily be space reductions.
“There’s potential for significant growth in suburban office, with companies choosing to have their own campuses, with a shift to the type of office development we may have seen in the 1980s and ’90s,” she said.
Leasing activity hasn’t increased greatly in the suburbs, according to Wong, though inquiries have increased.
He said Toronto’s suburbs have been averaging 500,000 to one million square feet of new office space additions over the past several years, focused more on smaller chunks in smaller buildings for tenant-specific uses than would be found downtown.
Wong thinks office space footprints for businesses will shrink a bit due to hybrid work approaches and it will be important to create flexibility with space in buildings as well as with lease terms. Co-working space will become a more important amenity tenants will look for to create flexibility as they grow, or for specific projects.
Smith said most EllisDon offices had been up to 70 to 80 per cent occupied, except in Toronto, which was about 35 per cent occupied. He would like to see all employees return, as he’s not a fan of working from home full-time.
Wolfe said supporting small businesses, restaurants and retailers is critical to avoid more widespread business failures and that’s harder to do while working from home.
Importance of technology
Wolfe said technology and property technology have been huge focus areas at Oxford and significant investments have been made.
Daily energy and carbon targets set since 2015 can now be monitored hourly at a granular level through data analytics, according to Wolfe, who said analytics are also being used to optimize investment strategies.
The construction industry is changing and relying more on technology and Smith said builders and developers have to work together closely to meet each other’s needs.
“It’s not (about) delivering the same thing more efficiently, it’s about delivering something else entirely or the same thing in a completely different way.”
EllisDon is investing heavily in construction information technology and analytics and employs 75 programmers.
“I believe that design software is going to merge with construction software and asset management software, so we have to work together,” said Smith. “The world is changing quickly and EllisDon will be a software company.”
Gomes cited cyber-security concerns, and a prevailing attitude at First Gulf that innovation isn’t keeping up with fraudulent activity. So, it doesn’t have much confidence in making major shifts in how it does business.
“The risks associated with hacking are so significant that there’s a lot of skepticism about the idea of new innovations being able to protect privacy. We really need proof of concept there before there’s going to be a complete adoption.”
Growing focus on ESG
When it comes to environmental, social and corporate governance (ESG), Gomes thinks the real estate industry is doing well with environmental advancements, but not as well with equity, diversity and inclusion.
“People know that we need change and they want to do the right thing, but the path forward isn’t entirely clear,” said Gomes. “Real progress in this area is going to take a range of actions” at individual and corporate levels.
Oxford is focused on developing sustainable buildings. Wolfe noted its 36-storey, 540,000-square-foot The Stack in Vancouver will be the first zero-carbon high-rise office tower in the world.
“If we don’t do our part to address climate change, we’re actually failing the communities that we’re helping to build,” said Wolfe.
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