The 2019 Land & Development Conference took place in Toronto on May 29th. Focusing on residential and commercial activity, the day’s sessions offered insights at local, national and global levels. B+H’s Peter Heys participated in a panel discussion to explore the future of Canadian office development considering the influences of coworking and evolving technology. We sat down with Peter afterwards and brought Joslyn Balzarini from our Seattle office into the mix for an American perspective.
According to CBRE Group, this year presents a once-in-a-generation moment for Canadian commercial real estate (CRE) shaped by record low vacancy rates, rising rents, waves of new construction and an unprecedented bargaining position for landlords. Meanwhile, JLL has reported that vacancies have declined in major American cities, particularly in Class A buildings with coworking and tech leading the way in leasing activity.
Just as every industry is experiencing their own versions of change in a hyper-connected world dominated by disruptive forces, CRE spaces are adjusting to become more future flexible to address changing tenant needs and expectations. Deloitte’s CRE Outlook for 2019 cites that 97% of their respondents plan to increase their capital commitment to CRE over the next 18 months, with the US and Canada at the top at 13% and 12%, respectively, adding to new North American supply.
Q: Let’s talk about this fresh supply. As new and expanding companies are looking for new spaces, what’s drawing tenants to these properties and what’s required to remain competitive in an increasingly changing market?
Peter: Without a doubt, tech-focused or “new economy” firms are driving the Canadian market in the GTA, Ottawa and Waterloo. When working with these companies during the RE selection process, we see three areas of focus. The first being flexibility, which translates into shorter, more fluid lease terms with options for expansion and contraction. Buildings with coworking spaces within or nearby also appeal, as they act as overflow space.
Amenities are important, including access to GOOD food (fresh, healthy, diverse), fitness, health & wellness facilities, and outdoor space (private terraces are gold!). Obviously, access to public transit remains critical.
Finally, robust building systems, meaning that buildings can accommodate increasing densities (now down near 100sf/person), with adequate exiting, washroom counts and fresh air. WiredScore ratings are scrutinized to ensure top-of-class technology is available, not just for data, but Smart Building and IOT capabilities.
Joslyn: Seattle is home to a lot of tech companies. We’re also seeing start-ups wanting shorter or shared leases. However, the big, established tech firms haven’t shown interest in short-term leases. The sheer number of employees they’re trying to house means a lot of them are occupying entire buildings so short leases don’t make sense.
Regardless of the lease length, all companies are looking for flexibility. Most tech work is organized around project-based teams. They want to assemble and disassemble quickly without needing to call a contractor.
The typical characteristics of team-based space is to provide a mix of heads-down/focus and collaboration areas with adjacent amenities. We do find a lot of these large companies allowing employees to have memberships in coworking as alternative workspaces.
Q: New and expanding coworking brands are playing a large role in the transformation of CRE. While they’re predominantly located in urban areas, they’re making moves to the suburbs. Given the density and diversity a city can offer to support coworking brands, how can coworking thrive in suburban areas?
Peter: We need to draw a distinction between suburban and small centre urban environments. Traditional suburban office parks, whose only amenity is a vast sea of parking, will struggle. However, downtowns in smaller cities will flourish, as they offer people what they really crave most – community. This will inevitably lend itself to coworking, as many “work from homers” will opt to spend a day working with others, feeding off the buzz, connecting and networking while they work.
The other reality is that coworks will continue to attract smaller companies, as a less risky strategy over signing a lease. The flexibility of space quantity and type, length of stay, and broad service offerings (bookkeeping, IT and HR support) now being offered will drive the growth of cowork exponentially.
One of the advantages Canada has over the US is much more robust public transit links. In the Pacific Northwest we’re starting to see investment in fast ferries and light rail linking smaller communities with major employment centres. This means smaller communities become a more viable option and are attractive because of lower house prices and lifestyle. We’re seeing a lot of development around transit. Coworking could offer a secondary place of work in these types of communities as part of the mix, especially if it’s happening in tandem with a resurgence in other amenities like restaurants, bars, shops and cultural attractions that create a sense of place.
Q: As coworking brands are taking more and more space in the CRE market, how are these types of tenants impacting building owners and operators?
Peter: Anecdotally we can say they’re gobbling up space at a rapid rate. As we search for the next B+H Toronto Studio location, we’ve been “beaten to the punch” on several available spaces by cowork firms! We’ve also seen firsthand the challenges that landlords face with large cowork tenants: longer elevator wait times, higher maintenance and cleaning costs, and pressures on security from a more transient tenant base.
One of the responses we’ve seen is developer/landlords exploring options to embrace or even join the cowork revolution. We’re working with a landlord who is converting under-performing ground floor retail spaces into shared tenant work lounges. Another is investigating a strategy to designate every 5th – 10th floor in their buildings as shared tenant coworking space, which responds to the flexibility issue discussed previously.
We’re also seeing security issues with coworking popping up in towers. In our own tower, we have several floors of coworking leased as an enterprise location to a single company. We’re seeing more and more companies use coworking as extensions to their main offices. Many cowork companies are offering enterprise services for this growing market.
The other big trend we’re seeing is the transformation of Big Box retail stores into corporate offices. We’re going to see a surge in these types of adaptive re-use as Big Box retailers continue to retreat. It’s an exciting challenge from an architectural point of view. All of our corporate clients have high expectations for natural daylighting, and it means punching big holes for skylights and atria into these dense boxes.
We just completed a transformation of an old manufacturing building for Microsoft. It’s an exciting challenge and not an easy feat to pull off. We planned our whole design around maximizing daylight penetration all the way to the first floor. We x-rayed the post-tensioned concrete roof and floor slabs to locate existing steel cables and cut over 800 tendons to produce two 70’x20’ atria. The result is a light-filled work environment and a new lease on life for an old building. We’re looking forward to seeing more of this type of reinvention as building owners and landlords begin to re-assess their assets at a time when the nature of work is changing far faster than the ability of space to keep up.