Pandemic Changes Fueled Spike In N.B. Office Vacancies
MONCTON – Work-from-home and hybrid work arrangements were one of several driving forces pushing up office vacancy rates in New Brunswick’s three largest cities.
Alexandra Baird Allen manages the Economic Intelligence Unit with Turner Drake & Partners Ltd. She is one of the minds behind a survey of New Brunswick offices showing that Fredericton, Moncton, and Saint John ended 2022 with a rising glut of vacant office space.
Baird Allen told Huddle the high vacancies are, in part, due to the pandemic lockdowns and the work-from-home arrangements that arose in response.
“People shifted to the work-from-home model and office spaces were empty, and that didn’t trigger an increase in the vacancy rate because the space was still leased out,” said Baird Allen.
Office spaces are typically leased out on three-to-five-year lease terms, she explains, so that use of space was never going to appear right away. As New Brunswick emerges from the pandemic, Baird Allen said it’s “up in the air” what vacancies will look like.
“With any large, economic event you see a change in how things are operated and how things are done,” she said. She noted that previous recessions have led to reconfigurations of the office, with a shift to cubicles in the 1990s and a shift to the bullpen-style office in the early 2000s.
“The commonality in all these things is fewer square feet of office space per employee. That’s contracting with a pandemic and some companies will move to an entirely work-from-home model, with no intention of going back to spaces–and that will reduce demand on the office market.”
Baird Allen said even with hybrid-work arrangements, the demand for office space can be reduced because less space is needed when people aren’t there all week, for example.
She said there’s a lot of potential downward pressure on demand for office space and that will start to trickle through as leases come up for renewal or cancellation.
Local Changes
Baird Allen told Huddle the trends influencing office vacancies depend on the city in question.
“Fredericton has probably been the most dramatic. Of the three New Brunswick cities, I would say it has an office-oriented economy that is most closely tied to the office market,” said Baird Allen. “It’s the seat of government and you’ve got the universities and so on there. Whereas Saint John and Moncton both have a higher proportion than Fredericton of industrial uses.”
Fredericton’s office vacancy rate jumped 2.7 percent from December 2021, rising to 18.4 percent from 15.7 percent. This increase coincided with a 0.2 percent drop in the total amount of rentable office space in Fredericton.
Between 2017 and 2019, Baird Allen noted the office vacancy rate in Fredericton dropped from 7.2 percent to 6.55 percent. She said any changes are more dramatic in Fredericton, since it’s a smaller market.
Part of Fredericton and Moncton’s vacancy rate increases were tied to growth, with new property coming on the market over the time period the study examined.
“A lot of the time a new building will come on stream, vacancy rates skyrocket, and then incremental demand might catch up with it and bring demand back down, depending on when it comes on stream versus when the survey happens,” said Baird Allen.
RELATED: Panelists Talk Post-Pandemic Hybrid Work At Chamber Event
From a broader perspective, Baird Allen said Saint John saw slight downward shifts in the amount of vacant office space in 2019 but things have held fairly steady in recent years.
Meanwhile, she said Moncton has seen dramatic drops in office vacancies in 2018 and 2019, with a spike in demand and vacancy rates reaching single-digit lows before shooting up during and after the pandemic.
“[Moncton] also had a fair bit of space added to the market in that time,” she said. She noted the Hub City saw more than 400,000 square feet of office space added to its inventory since before the pandemic.
“That’s buildings getting re-measured, converted, or new spaces built — or stuff that’s converted from owner-occupied. The increase in the amount of supply definitely has an impact on the vacancy rate,” she added.
Between December 2021 and December 2021, Moncton’s total square footage of office rental space grew by more than 66,000 square feet, according to the survey.
The survey showed that Saint John ended 2022 with the highest office vacancy rate, with a jump from 18.5 percent in December 2021 to 19.5 percent in 2022.
Office Space
How office vacancies factor into the future of what work looks like in New Brunswick’s three biggest cities depends on employer need.
Baird Allen said that with real estate being one of the biggest expenses after payroll, some employers may move toward a smaller office footprint.
“If you’re looking to save money and you are able to operate without a large real estate footprint, that may be a good model in terms of productivity and so on,” she said.
“Are you dependent on teams coming together to work effectively, where idea sharing and teamwork is really important? Can you be productive if you’re not in the office space? A lot of companies are finding that they need people to be together in offices because it’s better for the business model.”
She noted that busier office spaces also have runoff effects on local businesses that support workers in office spaces and that too much long-term office vacancy can be harmful to downtown cores.
“From an economic and municipal standpoint, the hope would be probably that employees would come back to work in their office spaces and support the other sectors of the economy,” she said.
On the flip side, more vacancy exerts downward pressure on rent for office space. That means potentially cheaper rent and more to choose from for prospective renters.
“If you are looking for a new office, this is probably a good time to be looking,” Baird Allen said.
In its study, Turner Drake said it expects an increase in office vacancies tied to gross domestic product.
Baird Allen said GDP is a key driver of demand for industrial and office space and that as it grows. demand for, and use of, commercial space also grows.
Sam Macdonald is a Huddle reporter in Moncton. Send him your feedback and story ideas: [email protected].