Despite soaring vacancy rates, the physical office isn’t going to disappear. As many Toronto office spaces sit empty, the way business owners and employees view the office is simply (and not so simply) changing.
“Employees are looking to employers for a curated workplace experience – one that’s worth the commute,” says Kane Willmott, a proven leader in creating bustling and successful office spaces.
The Toronto native founded coworking company iQ Offices back in 2012. There are now eight locations across Vancouver, Ottawa, Montreal, and Toronto. iQ Offices designs and manages elevated private workspaces that enhance productivity, creativity, and collaboration. Things like a modern design, boutique-level service, and trusted privacy set iQ Offices apart from traditional coworking.
Though coworking wasn’t a new concept back in 2012, Willmott noticed a growing desire for it. “We saw what was going on internationally, and that it was gaining momentum in other markets outside of Toronto,” he says.
Prior to the pandemic, Willmott says that the growing popularity of coworking was already a good indicator of what was happening in Toronto’s commercial real estate market – one typically characterized by sky-high lease costs and terms of at least five years. “In coworking, you have much shorter terms than a traditional office lease,” says Willmott. “The fact that it’s less of a commitment is attractive to business owners.”
While business is bustling for iQ Offices now that the pandemic is in the rear view, Toronto’s commercial vacancy rates have shot up to record-breaking levels when it comes to the office, as we used to know it.
Vacancy Rates Years in the Making
Willmott stresses that the office real estate market is very slow to react to anything – on the negative or positive side. “Real estate in general moves at a glacial place,” he says. “Something may happen that can be a shock to the market, but if the majority of leases are 10 years long, for example, then there is only an opportunity for 10% of the occupied space to come up, regardless of what’s happening in the market, because people are tied into longer leases.”
So, current vacancy rates are likely the result of decisions made years ago, in the thick of the pandemic and its transformation of both the workplace and daily life. “When COVID happened, companies that weren’t using their offices were able to give us their notice and leave,” says Willmott of iQ Offices’ clients. “Other companies that were locked into five or 10-year leases may not even have the opportunity to react for another three years when the lease is done.”
Now that they may have this opportunity, we’ve seen a sharp rise in vacancy in Toronto’s commercial real estate market.
“When you look at the vacancy rates and reports of what’s happened quarter-over-quarter and year-over-year, the trend is that vacancy rates are going up and are at record levels,” says Willmott. “When people look at those figures, they tend to think that everyone is exiting their offices. Really, that is happening, but what we’re seeing is an exodus of companies that made these decisions four years ago, but – because they were committed to leases – were unable to act. But because real estate moves so slowly, all these spaces that were under-utilized are just now coming to the market.”
In contrast to the vacant office buildings, coworking spaces like IQ were able to recover quicker once the term “social distancing” was no longer in our daily vocabularies.
“What our model allowed us to do, on the other side, was to fill up faster once the pandemic subsided,” says Willmott. “We transact quickly. You can come in and sign an agreement and have your entire team moved in there and working the next day, with internet and furniture, and everything they need. Even if a traditional office is built-out, just the paperwork to do a traditional lease is going to take three months, let alone everything you need to get that space up and running.”
A “Dichotomy in Terms of Demand”
While Canada’s commercial vacancy rates have shot up across the board, this rate varies between assets, says Willmott. “We’re seeing a dichotomy in terms of demand in the market,” says Willmott. As companies need less office space than they did pre-pandemic, some are opting for better, but smaller, spaces. It comes down to the employee experience and meaningful engagement. “For the same cost, companies can either have a 15,000 square foot office in a B or C quality building, or a 7500 square foot office in a AAA or trophy asset,” says Willmott. This concentrates demand into the trophy assets.
“The heads of companies do see value in bringing their employees into an office,” says Willmott, referencing Amazon’s recent return-to-office policy. “Everyone is looking for a return on that investment, however. They’re saying, ‘if I’m spending $50,000 or $100,000 every month, I want engagement.’ They want to attract, retain, and engage the best talent, who can innovate and move the business forward. If you, as a leader of a company, can use the workplace as a tool to drive engagement, you’re going to start to see positive returns in terms of profitability, innovation, and competitive advantage.”
According to a Gallup study, companies in the top quartile of employee engagement experience 21% higher profitability than those in the bottom quartile. This statistic paints a vivid picture: engaged employees are not just satisfied employees—they are a direct line to improved financial outcomes.
Activated and Engaging Spaces
Business owners are starting to understand that a plain, old, uninspiring office just won’t cut it. Due to the newfound ability to perform work remotely, expectations for being called to location have soared. Employees now expect a return on the time invested in the commute.
Coworking spaces have benefited tremendously from this shift in mindset, says Willmott. More companies – including large, international corporations – are outsourcing the office experience to co-working spaces like iQ Offices.
With amenities like outdoor terraces, lounge areas, top-quality technology, friendly staff, and more, iQ Offices offer an activated and engaging environment – one that’s indeed worth the commute (even in Toronto traffic). “What we offer is difficult for companies to replicate on their own in under 10,000 square feet,” says Willmott. “We have to earn the commute of every single person that comes to IQ every single day. And, if we don’t, that’s a fail.”
Willmott says this curated experience is one that’s constantly evolving. “Some business owners think they can replicate what we’ve spent 12 years perfecting,” says Willmott. “It’s really hard to forecast and say, ‘I have this many employees and am going to take on this lease for say five years.’ Often, it doesn’t work out or isn’t used in the way you think it will be used. What if it’s too crowded? What if it’s not crowded enough?.”
With coworking spaces, however, you can make micro adjustments as you go along, something you don’t get in a traditional office. Willmott also points to hidden costs often not considered when leasing traditional offices.
“Often, companies may leave coworking spaces because they think a traditional office may be cheaper, but they underestimate the costs and the execution isn’t as simple as they planned,” says Willmott. “A trend we’re seeing is small and medium businesses move to traditional leases from coworking. On the other hand, big, international companies are coming into coworking spaces, knowing that it’s the least expensive way to get that curated employee experience.”
Back to the Office
Moving into 2025, Willmott thinks Toronto will see more vacant commercial spaces fill up, as the general trend is back to office – at least, to some degree. “We will see positive absorption in Toronto as we see more space get leased. The challenge in making the prediction is understanding how much empty, leased space still needs to shake out. How much space is sitting there vacant and dark and unoccupied that the same companies will be letting go of to move into a smaller space?.”
He expects that renewal probability for 2025 will be relatively low. “But in general, you’ll see more utilization of space,” says Willmott. “They’re going to be the ones coming off a five-year lease in 2020 or a seven-year lease in 2018.”
In the meantime, it’s safe to say that countless Canadian company heads will turn their sights to coworking spaces like iQ Offices as “business as usual” continues to evolve with the times.
