Can the big banks’ return to in-person work save Canadian offices?

Commercial real estate owners and investors in the office market might be seeing the light at the end of a very long tunnel. The Canadian office sector has been sluggish since the COVID-19 pandemic and while other developed countries like the US and Europe have seen more widespread returns to the office, Canadian remote workers have been far more reticent to start commuting again. That trend may begin to change, though, as four of Canada’s Big Six banks have now mandated that their workers return to the office at least four days per week.

Scotiabank, BMO, RBC, and TD have all mandated this policy, and there is widespread speculation that CIBC and National Bank may follow suit. Given these companies’ massive workforces, scale, and role in the wider Canadian economy, Keith Reading says that the impact of this return to in-office work could be truly significant for Canadian commercial real estate. The Senior Director of Research at Morguard outlined exactly why this deal could have such an impact, beginning with a sense of these companies’ scale.

“They've always been the trendsetter in the office market,” Reading says. “In terms of actual square footage, it's definitely in the millions of square feet. They're in every major city across the country, and they have big blocks of space. If I look at Toronto, the biggest market in the country, the banks had the biggest complexes. Think of CIBC Square, RBC Royal Bank Plaza, or the TD Center, which is a collection of five towers. They're a substantial user of office space.”

Reading accepts that from a real estate utilization perspective, ‘bank’ is a somewhat poor descriptor of these companies. Canada’s Big Six are better understood as massive financial conglomerates, with huge asset management, insurance, and other financial services businesses. As a result, their office utilization is somewhat more sizeable and varied than the blending of retail and office space that’s required for the maintenance of bank branches. It’s those other areas of financial services that require some of the massive square footage in the banks’ downtown office towers.

The impact of this return to office may go well beyond Canada’s downtown cores, however. Reading notes that these banks have become significant office tenants in many Canadian suburbs where office development saw something of a boom before the pandemic. Reading expects that both suburban and urban office real estate in Vancouver, Montreal, Calgary, Edmonton, Ottawa, and Toronto will see demand upticks from this move. Toronto, he says, will likely see the biggest impact.

There is a deeply symbolic importance to this return to office, Reading explains. These are some of the biggest business brands in Canada and countless ancillary businesses exist in an ecosystem where these institutions play a keystone role. The banks’ embrace of in-office work should also prompt other businesses to mandate returns of their own. Though Reading notes that the ongoing competition for the best talent will remain a factor in whether Canadian companies decide to pursue returns to the office or not.

Important as the banks’ return to office is for Canadian commercial real estate, Reading notes that this is just a positive first step for the market. The scale and length of the office real estate downturn is enough that the recovery will take much longer than in any normal cycle, Reading notes. The fact that new office development has slowed to a crawl should help support the recovery. The entry of the banks as a more meaningful source of demand can also help investors in the sector feel a bit more positive.

That is not to say there aren’t still risks to this recovery. Reading highlights wider risks to the Canadian economy and notes that if Canadian growth stays sluggish, or even slows into a recession, we could see the recovery derailed by weak hiring and even rising layoffs. On the other hand, if jobs growth in white collar sectors begins to surprise to the upside, then the office recovery might truly be on.

“The messaging for retail investors is that this sector is something to certainly keep an eye on. If the momentum starts to build as we hope, I'd certainly be looking more closely at investing in office. But I think it's probably a little bit early right now to really sink serious funds into the office market,” Reading says. “Having said that, if we look at the private investor there are some opportunities to get assets that are going to perform, but you've got to have an appetite for some risk if you're buying office.”