How the real estate market is about to turn your job upside down

If you ever get bored at a dinner party, here’s a little game you can play with a friend: bet how long it will take someone to mention the cost of real estate.

It is almost inevitable that the subject will come up. Forget about maple syrup, the outdoors or multiculturalism. There’s simply nothing more Canadian than talking about real estate.

And it’s no wonder. Most of the country is grappling with an affordability crisis, and in the most populous regions, the cost of housing is a looming, inescapable factor.

Alas, add one more thing that is rocking the real estate market: your job.

That’s at least a reasonable assumption after we had another sign that commercial real estate is being settled. According to commercial real estate firm CBRE, nationwide office vacancy rates have risen to the highest level since 1994.

Simply put, as remote work has become more common for white-collar workers post-COVID, the need for commercial real estate has plummeted.

It is tempting to think in idyllic terms and believe that there will be a good solution. Behavior changed in response to a historical event, and over time we will simply need fewer offices.

But rarely does it run so smoothly. On the contrary, a confrontation between companies and their employees is more likely.

It’s helpful to put things in context. Not too long ago, most North American cities had central business districts with larger office buildings and not much else. But the urban renewal that started in the 1990s led to gentrification and ensured that the inner city attracted more and more people.

In those days it was a virtuous cycle: companies rented and opened office space, while people wanted to work and live in the center.

How things have changed. With the prevalence of remote working, that cycle is now instead a vicious circle, in which not only commercial real estate suffers, but all related businesses that cater to an office audience also suffer.

The first and most obvious problem is that companies that have invested in commercial real estate view remote work as a financial burden. Having put money into real estate, whether through construction or long-term rent, they are now motivated to recoup that investment.

A slightly more cynical reading of the situation is that with so much capital at stake, there is a structural incentive for workers to return to the office, otherwise those offices will remain empty and become a drain on one side of the balance sheet.

This could play a role in why many CEOs are calling for a return to the office. It is not just the possibility that it will lead to better results – a proposition that needs further discussion and study – but that it is about recovering sunk costs.

There is another looming real estate problem here. As the country’s largest urban centers continue to grapple with an affordability crisis, people are being driven out of areas that have only recently become so vibrant. And for those who can work remotely, there is more motivation to move to the suburbs, or even further afield.

After all, the worst thing about living far from the city center is the commute. If you don’t even have that, many simply ask: well, why stay?

In that sense, one of the factors driving remote work isn’t just convenience or lifestyle: it’s the chance to live somewhere cheaper.

The real estate market thus pushes work on both sides: affordability for employees and capital investment by companies.

There are a few possible solutions, but one particular sticking point is the stark difference between a five-room office and a 70-story skyscraper. The towers crowding downtown Toronto must be filled with workers or converted into housing.

It’s a phenomenon that’s happening all over the world, but that doesn’t mean it’s easy.

The other problem is that those holding the housing policy levers — people who have so far done almost nothing to alleviate the affordability crisis — must reckon with the productivity losses if the real estate crisis continues.

Real estate is everything in Canada, but it is a situation that is not sustainable. It accounts for the largest percentage of gross domestic product, dwarfing other sectors such as manufacturing and mining. For an asset class that just sits there, that’s phenomenally wasteful.

Employees want to work from home. Companies have excess real estate and offloading or transforming it is no mean feat.

It all adds up to a second real estate crisis, and it will manifest itself in tensions between workers and their bosses. Yes, it’s true, we’ve been talking about real estate all along. But in the discussions that take place over snacks and bubbles in the halls of power, this looming conflict should also be considered.

Navneet Alang is a Toronto-based freelance contributing technology columnist for the Star. Follow him on Twitter: @navalang

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