During the first quarter of 2022 businesses gradually introduced their return-to-office plans. Many companies, including 42% of those surveyed across Crown’s portfolio, acknowledged the quintessential need for an office and have either adopted a “hybrid” work model or intend to do so. This model requires collaborative days in the office with the flexibility to occasionally work-from-anywhere, a model that was already prevalent among the knowledge workers that now dominate our major Canadian markets. While Canadian businesses haven’t made the same headlines as American banks and tech firms in terms of expanding their space commitments, office market conditions in our primary markets have remained balanced.
The new work model is influencing tenant requirements as businesses are seeking spaces where collaboration, training and culture can thrive. They are looking for flexibility, adaptability and wellbeing. With these key themes, the distinction between high and low-quality spaces and operators will become more apparent as well as a flight to quality. Both occupiers and the investment community are fueling the adoption of ESG-related initiatives in office buildings, as more businesses commit to reducing carbon emissions and take a more active role in employees’ physical and mental health.
Following a Bank of Canada increase in the overnight rate, 5 and 10-year bond yields are now 266 and 280 bps, respectively (+139 bps and +138 bps from last quarter). The market continues to anticipate additional increases in keeping with the Bank of Canada’s 2% inflation target. The Russian invasion of Ukraine is adding further inflationary pressure and commercial real estate lenders are being understandably cautious. It is likely that they will take a barbell approach to their lending strategies favoring either high yield strategies or lending on core Class A assets.
In this environment, Crown’s value-add thesis has never been more prescient. Not every office building and owner will be able to keep pace with the rapidly evolving demands and market expectations. Of course, executing a value-add business plan in an environment of uncertainty requires experience and discipline. We will continue to be steadfast and focused on executing our plans, while always identifying opportunities to de-risk our portfolio.