Home Month and Year July 2021 Flat but Recovering

Flat but Recovering

The downtown core is the key

Edmonton’s downtown core is still prime office space.

For Edmonton’s unique commercial real estate and office leasing sector, accustomed to the ever-changing ups and downs of the real estate and the economy, there are some changes happening.

While business, schools and Edmonton communities are already adjusting to new normals in most aspects of Edmonton life, there is post-pandemic, post-lockdown and post-work-from-home light at the end of the 18-month tunnel, and Edmonton’s commercial real estate sector is dealing with significant new normals. While the biggest hit, of course, came from concerns about public health and COVID lockdowns and restrictions, there were other business broadsides. Edmonton (and all of Alberta) is more than six years into a severe commodity price-induced downturn, which has significantly affected Edmonton businesses, the Edmonton economy, migration, employment, consumer confidence and the demand for commercial real estate.

“The downtown Edmonton office market saw a halt in activity as soon as restrictions were put in place,” explains Fahad Shaikh, senior vice president with Colliers International in Edmonton. “It led to very limited activity in the downtown market until only recently. Over the past month or so, we have seen a drastic uptick in activity as restrictions were slowly reduced and people made their way back downtown, again.

“Other space (suburban space) had slowed down considerably as well, but not to the extent of downtown. Currently, suburban markets have seen steady activity as some businesses have opted to relocate from the downtown core to a suburban location.

“Overall, the entire (combined downtown and suburban) Edmonton office vacancy has climbed from 15.7 per cent in 2019 to 18.6 per cent in 2021. This has been largely attributed to more sublease space coming to the market and certain companies reducing their overall footprint as they embraced a remote working strategy.”

He details that during the same time range, there were increases in the prime downtown office market vacancy rates. Class AA spiked from 13.8 per cent to 17.2 percent, Class A from 17.1 to 18, Class B from 10.7 to 14 and Class C from 20.6 to 26.4.

Edmonton’s commercial real estate market is dealing with more than just the stereotypical office spaces where traditional nine-to-fivers work on computer screens in offices and cubicles and run from meeting to meeting.

“As in other markets across Canada, the hospitality sector has been impacted the most during the pandemic,” says CBRE’s Edmonton managing director Dave Young. “Needs based retail (food and drug anchored assets) have performed well but the unanchored strip centres have witnessed some decline.

“As vaccinations continue to occur and the economy opens, we anticipate the retail sector of our market will recover. The industrial market, after a slow second and third quarter of 2020, has seen increased activity in both leasing and investment sales, and the Edmonton market continues to evolve as a distribution centre with many national and international tenants taking positions in the region.”

When it comes to conventional office space, Young notes that vacancy rates in the core remained fairly flat from 2019 to present and only the B market showing any upward pressure. “We attribute this to a ‘flight to quality’ as tenants take advantage of better quality assets (AA and A) at more attractive rental rates. Landlords that are re-investing in their assets are seeing leasing velocity pick up. The B and C markets will continue to experience challenges as tenants demand more from their office premises.”

With all the unexpected disruptions and uncertainties, Edmonton’s commercial real estate has actually turned out to be a bit of a good new/bad news story.

“There have been many effects felt due to the pandemic, both in a positive and negative manner,” Shaikh points out. “On a positive note, the lockdown has forced Edmonton businesses to become more creative and agile in their day-to-day operations. Many organizations are taking drastic steps forward on the technology front as businesses were forced to find creative ways to enable employees to work from home.”

“On a more negative note,” he adds, “the lockdown has impacted many small and medium sized organizations that, due to lockdown measures, were not able to operate their business at the level they required to be successful and, unfortunately, have since gone out of business.”

There is much concern – and speculation – about the long-term impact of mandatory work-from-home trends and routines. Buzzing office environments have, for now, been replaced by Zoom meetings and employees doing their work between chasing after the kids, raiding the fridge and feeding the dog. Is virtual work here to stay or was it employers and employees doing whatever they had to do to get the job done?

“I am a believer in the importance of the office as it relates to building culture and growing a company,” Young says. “The work-from-home experience has shown that there will be more flexibility in the work week, but the complete elimination of the office will not occur. People need interaction with other people and it’s very difficult to collaborate over Zoom calls every hour on the hour. A company’s culture is what attracts and retains its most important assets – employees.  Communication, collaboration and culture are the keys to why the return to office will occur.”

As companies strategize about the space they need (and maybe no longer need) and allowing for the business interest in a hybrid system of working part of the week in-office and another part from-home, it may be turbulent times for Edmonton’s commercial real estate, as the workplace new normals settle-in.

“Downtown Edmonton certainly has a long way to go,” Shaikh says, weighing several factors. “It has lost a lot of the momentum it was building towards in early 2020 when the addition of new office towers, multi-family projects, retail shops, ICE District, and many other amenities were giving the downtown core a sense of vibrancy and peaking people’s interest beyond the 9-5 hours. This had to take a step backwards due to the pandemic, and the reduced number of people spending time downtown. It’s just a guess but, we expect it may take two to three years to recover.”

Young is positive but also, from much Edmonton experience, realistic. “It’s still early days as it relates to ‘what’s next?’  We are working with a number of users about what their premises looks like in the near term.  What is for sure is that companies are reviewing their real estate requirements in order to position their companies for the anticipated ramp up of the economy.”

As with so many post-pandemic facts of life, there is a consensus about light at the end of the very long and challenging tunnel. “The Edmonton real estate market has been extremely resilient and is trending in a positive direction,” Shaikh says enthusiastically.

“The outlook for the remaining year and moving into 2022 is positive as we are seeing a resurgence of activity in the marketplace. As more vaccines are distributed and government restrictions are loosened, we expect this trend to continue and hopefully we will be back to the state the market was in prior to the pandemic.”