Why high-end office towers are still thriving in post-pandemic world

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Ivanhoé Cambridge’s Jonathan Pearce on how landlords are dealing with the post-pandemic reality and more

A construction crane above Brookfields Bay Adelaide North, the third office tower to be built on the Bay Adelaide Center site in Toronto. A construction crane above Brookfields Bay Adelaide North, the third office tower to be built on the Bay Adelaide Center site in Toronto. Photo by Chris Helgren/Reuters Files

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On January 4, Ivanhoé Cambridge announced that Fox News and News Corp. signed two separate long-term leases in what it describes as the largest lease in Manhattan in three years. Following the transaction, The Financial Post’s Shantaé Campbell emailed the Montreal-based real estate company’s EVP of leasing and development, Jonathan Pearce, about some trends in the commercial real estate space and how landlords are dealing with the post-pandemic reality.

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FP: Given the market uncertainty, do real estate companies want to retain their anchor tenants?

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Jonathan Pearce: It’s not a one-size-fits-all situation. Demand for well-located, transit-oriented new build and well-serviced buildings remains extremely strong in most Canadian and US markets and these types of assets continue to outperform and be heavily leased. There has been a material “flight to quality” trend for a number of years that has definitely been accelerated by the pandemic. More and more tenants want the most amusing and experiential workspace in newer buildings with the highest sustainability certifications and state-of-the-art building systems and HVAC. This is seen as a way to attract and retain talent, foster an immersive experience of company culture, provide flexible workspaces to support activity-based functions, and “earn the commute to work.”

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The same is not true for older utility buildings that may be in secondary locations and/or need upgrading and upgrading – these “donor” buildings will struggle in a more uncertain market as tenants seek to differentiate themselves. The flight to quality will exacerbate the challenges faced by B and C class buildings, forcing them to reinvent themselves, compete more on price or even be considered for alternative uses.

FP: Is it common to extend a lease a few years in advance?

JP: That depends very much. A number of factors play a role in tenant and landlord decision-making in this regard. On the tenant side, timing is usually driven by considerations such as the lease expiration date, the size of the space needed, the amount of suitable options available on the market, the budget, the reusability of the space for the tenant (i.e. the existing Investment a tenant may have spent on fixtures and/or infrastructure) and whether the occupier plans to make any significant investment or upgrade their premises (they will want to ensure they have adequate remaining lease time to justify the investment and the cost of amortizing the leasehold improvements). On the ownership side, this is more concerned with the quality of the asset, the competitive situation, and the occupancy level in a given asset (meaning that a landlord with high vacancy rates is likely to be more “defensive” in its efforts to expand its tenants than an asset landlord who are well leased and may choose not to trade in a more volatile market) and of course general market conditions.

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  1. Office and shopping center demand has been slower to recover from the impact of the pandemic.

    Why those waiting for a return to commercial real estate normalcy will be left behind

  2. A rental sign hangs in the window of a vacant office building in Saskatoon.

    Aging workforce, hybrid work among office real estate challenges

  3. According to Ivanhoé Cambridge, the deal to extend the leases of Fox Corporation and News Corp at their 1211 Avenue of the Americas Tower in New York City is the largest in Manhattan in more than three years.

    Ivanhoé Cambridge ties anchor tenants Fox and News Corp in largest Manhattan deal in three years

FP: Do tenants have a little more leverage than usual to request upgrades on a property?

JP: This is not a one-size-fits-all either. This really depends on the property, its vacancy/occupancy profile and how it fits into the overall competition in terms of location, quality, amenities and of course tenant demand. In general, owners of the best, newer, well-leased assets have experienced far less leverage on tenants than perhaps resource project owners. Some landlords of the best projects (such as Ivanhoé’s CIBC SQUARE) have actually seen an improvement/increase in overall achievable economic conditions during the pandemic as demand for the best and newest projects has actually increased despite lower overall demand.

FP: Is there a feeling that landlords are biting the bullet and are therefore willing to invest in upgrades now?

JP: Definitely a feeling that this occurs as a general statement. CapEx investment in upgrades is very evident, particularly in older or standard buildings that need upgrades to remain relevant and compete for tenants who are increasingly demanding when it comes to flexible, experiential, amenitized and differentiated workspaces.

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