Greg Bonnell

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When Shopify Inc. CEO Tobi Lutke declared the age of office centricity over, investors were left wrestling with a monumental question: Will the work-from-home movement change business forever and, if so, what is the case for investing in office space?

Lutke’s statement via Twitter on May 21 read more like a manifesto of sector-wide change than one company’s plan for the future.

“As of today, Shopify is a digital by default company. We will keep our offices closed until 2021 so that we can rework them for this new reality,” Lutke tweeted.

“We cannot go back to the way things were - this isn’t a choice, this is the future.”

Shopify’s declaration was not made in isolation. Several large technology firms including Facebook Inc., Twitter Inc. and OpenText Corp. have promised to make remote work a standard practice for many of their employees. And some three million Canadians have shifted to working from home since the lockdowns took hold in mid-March, according to Statistics Canada.

If this is the beginning of a new work culture, then office property investors could be facing a whole new investment thesis.

BNN Bloomberg asked several regular Market Call guests for their views on investing in office properties, and here’s what they had to say.

Greg Newman, senior wealth advisor and portfolio manager, Newman Group, ScotiaMcLeod

“As a result of COVID, many areas will be disrupted. One of those sectors will likely be office towers.

While companies will need a physical hub, the ability to connect with less physical space than before will be a headwind that may take several years to right-size. Technology and the ability to connect virtually will also likely improve, enabling the trend further. These events will likely transpire even if the virus suddenly goes away. The longer it lasts however, the more pronounced the upfront effects.

As office towers respond, the solution may be in part to convert to residential, which could pressure the residential REITS (Real Estate Investment Trusts) somewhat too. I have found that when a sector is on the precipice of meaningful disruption that it is best to not fight the trend. As a result, for now, I am a seller on strength in the area.”

Christine Poole, CEO and managing director, GlobeInvest Capital Management

“In the near-term, there are leases in place that are legal obligations. However, as leases expire, there may be less need for space, resulting in higher vacancy rates, lower pricing and eventually lower construction activity. Investors should focus on a REIT’s lease maturity schedule and sector exposure within its tenant base.  

Traditional work offices will still exist given the need for face-to-face meetings, social interaction, collaborative working environments and maintaining a flagship head office presence.          

We do not currently own any office property REITS. We own Brookfield Asset Management (BAM) so there is indirect exposure through Brookfield Property (BP). BAM owns about 55 per cent of BP. BAM is well-positioned in the growing alternative asset management sector. BP is a diversified global property owner and developer with a portfolio of high-quality assets. Its office property portfolio has an average lease term of nine years.”   

Paul Gardner, partner and portfolio Manager, Avenue Investment Management

“Well, it’s problematic. As you know we have pushed technology to the front and centre in order (to work from home). Many people are getting comfortable with this.

In one way, productivity is higher, (according) to a recent Chinese study – around five per cent more productive. So the fear of ‘messing around’ at home seems to not be happening. But at the same time, creativity and collaboration must be impacted.

As an investor, our ownership of real estate is all about multi-dwelling (apartments) and industrial and grocery anchored. We are not touching office or retail. It’s too hard to forecast what will happen to these assets, although the risk is on the downside.”

Brian Madden, senior vice president and portfolio manager, Goodreid Investment Counsel

“What’s the future of office space, whether a company is a pure play office REIT or a more diversified entity? It’s probably still good long term, although perhaps not in the short term and medium term as the economy recovers from recession. Undoubtedly more knowledge-industry workers will choose to work remotely some or all of the time post-pandemic. Their offices will not be eradicated altogether though, as meeting spaces will still be needed.

But it’s reasonable to think that for a given number of staff, knowledge-industry businesses may need fewer square feet of space. It’s hard to imagine a future of entirely virtual companies where no one ever goes into an office or collaborates face-to-face with their colleagues. We’re all managing just fine remotely during this pandemic, but many of us will welcome a return to the office for the informal collaboration, the networking and career advancement and mentoring opportunities for junior staff and perhaps most importantly the mental separation of personal space and time from work space and time.

So, for investors thinking of investing in the space, I think a few considerations should be addressed, all of which exemplify ‘best-of-breed’ characteristics, which is how we’re approaching every sector in our portfolios these days:

• Financial strength/liquidity
• Exposure to favourable demographics in vibrant and cosmopolitan global destination cities (i.e. Toronto, Vancouver, NYC rather than Calgary, Halifax, Detroit, Cleveland, etc.)
• Well-situated (i.e. downtown central business district or near transit hubs vs. suburban locations) unique and modern spaces”

This is the fifth instalment in 'The Evolution of the Workplace,' BNN Bloomberg's weekly in-depth series looking at how workplaces in Canada are changing due to the COVID-19 pandemic.