Office buildings in Toronto’s financial district

Since late March, almost 40% of Canadians have been working from home as a result of Covid-19 — and it remains to be seen how many will return to the office when the pandemic is over.

In recent weeks, the CEOs of Morgan Stanley and Goldman Sachs have indicated that working from home could be the new normal for many employees going forward. Companies around the world have now transitioned to remote work, which poses the question: Will they do away with their office space entirely when their leases expire?

“This definitely has longer-term implications,” said Jeff Olin, president and CEO and portfolio manager with Toronto-based Vision Capital Corporation, an alternative investment manager focusing on publicly traded real estate securities.

Olin, who worked in corporate real estate for a decade, said there were already “secular trends in place suggesting a decrease in demand for office space” before Covid-19. For example, Deloitte offices in Toronto and Montreal have already moved from about 300 square feet per employee to 160 square feet per employee, Olin noted.

While Olin doesn’t expect all offices to be vacant after the pandemic — some employees, he suggested, will be happy to no longer work with kids underfoot — companies like WeWork, which provides shared office space, may be in trouble post-Covid.

“The WeWorks of the world are really going to have problems coming out of this,” Olin said. “A lot of the absorption of office space in the United States and Canada has been driven by WeWork-type companies.”

Olin added that there will be “some mitigation” of the reduced demand for office space, suggesting that the trend toward smaller office footprints may slow after the pandemic.

“People are going to want more social distancing within their work environment. That is going to offset some of the pressure on the downside [for office space],” Olin said. “We’ll want to create more distancing, and that will help put a floor on that reduction in square feet per employee.”

Another area that Olin expects will struggle is retail space. Vision Capital has taken a short position with retail “for a number of years” as e-commerce has risen in popularity. Olin expects Covid-19 to accelerate the movement away from bricks-and-mortar stores. Even businesses that were once thought of as “coveted tenants” in the retail space, such as grocery stores, will face challenges.

“Over the last six weeks, grandma has figured out that she can go online, order her groceries and have them delivered to her door,” Olin said. “Grandma now doesn’t need to get into her car and drive to the Loblaws or the Safeway, park and have all of that stress.”

Shopping malls continue to face “long-term pressures,” Olin noted, although he thinks the best malls will recover after the pandemic, when people suffering from cabin fever are allowed to venture out in search of retail therapy.

“The best [mall] locations, where you can provide alternative uses with apartments and office space and other creative uses, will continue to do relatively better,” Olin said.

As e-commerce continues to gain ground, warehouse space will become an increasingly attractive investment, Olin predicted, noting that e-retailers need more warehousing capacity than traditional retailers.

“You need three square feet of industrial space for an e-retailer compared to every one square foot you need for a store,” Olin said. “If you buy something in a store, there’s an 8% likelihood you’ll return that item to the store. If you buy something online, there’s a 30% chance you’re going to return that item to the warehouse.”

Olin said he expects higher levels of inventory to be held in warehouses going forward to mitigate future supply chain shocks. He also predicted there will be a “likelihood of some element of de-globalization” coming out of Covid-19, which would shore up manufacturing in North America and further increase the need for warehouse space.