REDUCE COSTS WITH A HYBRID WORKING MODEL

HOW 2 +2 + 1 = REAL ESTATE SAVINGS

In 2020, COVID-19 pressed the world into an unexpected remote working experiment and, for most, productivity did not decline. Employees proved they can be trusted and it seems the new work-from-home model is here to stay. This is good news for companies hoping to save money on real estate costs.

REMOTE WORKING IS WORKING

• In July 2020, a PWC Canada workforce poll conducted by the Angus Reid Group of 1,528 full-time or part-time Canadian employees and a sample of 505 Canadian employers found 75% of Canadian workers say their productivity had not changed or had even increased during the pandemic. i

• According to a recent McKinsey Research survey, 80 percent of those questioned reported they enjoy working from home. ii

• The Grossman Group conducted an online survey in April 2020 of employees across different sectors and 48% said they’d like to continue working from home. iii

The work from home experience has proven it’s time for businesses to rethink the traditional 9-to-5, commute to the office, work model. Including some form of remote working in a business model can increase employee satisfaction and retention and save money on real estate by reducing the amount of space required. iv

BENEFITS OF WORKING FROM HOME

The jump to remote working for most in 2020 was instigated by safety concerns in light of the global Coronavirus pandemic. Remote working makes it easier to practice social distancing, protecting health and safety. Remote workers and employers are now citing a variety of other reasons why working from home improved productivity and worker satisfaction.

• People are regaining minutes and even hours in the day without a commute to the office, leaving more time for work and family.

• Organizations are rethinking their perception of employee accountability and performance metrics from a traditional hours-at-their-desk approach to one that focuses on project-completion. This enhanced autonomy equals increased job satisfaction.

• Broad acceptance of virtual meetings mean project teams are no longer limited by geographic proximity. Team members can collaborate and pitch from anywhere in the world, ensuring the best experts are present without lengthy and expensive travel constraints.

• Businesses that embrace remote working also benefit from broader access to global talent.

• It is also no longer necessary for a firm to have enough prime, expensive office space in major urban centres to seat all of its employees and to attract talent.

The world’s experience in 2020 proved that being in the office full-time is not essential to carry on business. Leading organizations will take the lessons of this remote work experiment and pioneer the change in how we do business and how we use office space.

WHY WE STILL NEED THE OFFICE

AND WHAT IT MIGHT LOOK LIKE

While remote working has functioned well for the most part during the unforeseen challenges of protecting lives and health during a global pandemic, it has also shown that some tasks are better fulfilled in a traditional office environment.

Individual work and project execution may be completed remotely, but the following interactions are best accomplished in person.

• Collaboration

• Onboarding

• Brainstorming

• Innovation

• New project initiation

• Socializing (important for the mental health of employees)

Pre-pandemic, the typical office included a reception, open floor of cubicles, a few private offices, meeting rooms, lunchrooms, and server rooms, allowing approximately 200 square feet per employee. A new normal post-pandemic may require a transformed office. New office designs may include greater space for employees to allow for social distancing. They may also emphasize space for collaboration and flexible touch-down desks rather than personal work spaces.

Returning to the office post-pandemic offers organizations an extraordinary opportunity to take bold steps to reimagine the office, taking advantage of alternative workplace strategies, including remote working, to make their space more productive and cost effective. A repurposed office offers significant potential to save money on real estate costs by reducing the amount of space needed.

HYBRID WORKPLACE MODELS

Allowing employees to work remotely improves job satisfaction and can save employers money, but, as we have shown, does not work for every employee or every task. Many companies are considering Hybrid Workplace Models which bring employees into the office a few days a week and allows them to work from home on others, combining the best of both working systems.

A Hybrid Working Model would create a rotational work schedule which brings a subset of employees into the office on certain days while another subset of employees work remotely, and the groups would alternate locations day by day. Many schools were the first to embrace this new model of on-again off-again physical attendance in order to limit the number of students in a school building at any one time.

According to a McKinsey & Company Global Institute analysis, the sectors with the highest potential for remote work and hybrid models are: finance and insurance; management; professional, scientific, and technical services; and IT and telecommunications. v

When only a portion of employees are in the office at one time, less space is needed and businesses can reduce spending on rent, office supplies, utilities, etc., freeing funds for reinvestment in innovation and growth.

2 + 2 + 1 HYBRID WORKING MODEL

There are a few ways to approach remote working, including: 1) all employees remote and no physical space; 2) fixed set of remote workers and fixed set of in-office workers; and 3) alternating sets of remote and in-office employees. Organizations need to work with their Human Resources and IT groups to determine whether remote working fits their business model and, if so, which form can best be adapted to meet their requirements and corporate goals.

Cooper Project Spaces recommends our 2 + 2 + 1 Hybrid Working Model as the most versatile and cost effective. Using the 2 + 2 + 1 Hybrid Working Model allows businesses to get the most efficient real estate space utilization and combination of remote and in-person employee attendance.

In the 2 + 2 + 1 Hybrid Working Model, employees alternate 2 days in the office, 2 days working from home, and 1 flex day.

• Two days in the office are focused on tasks best performed in-person with other members of their functional team, such as collaboration, brainstorming, innovation, new project development, and team building.

• Two days working remotely allow time for individual work, project execution, production, and delivery.

• One day allows a flexible use of time based on need such as additional work-from-home individual work or offsite client/team meetings (coffee shops, video conferencing, customer visits, etc.).

2/5THS WORKFORCE ROTATION

The next decision to make is which employees will be in the office and when. Cooper Project Spaces recommends using the 2/5ths Workforce Rotation model we have designed in order to get the most out of your real estate. In the 2/5ths Workforce Rotation, your employees are divided into five relatively even groupings—A, B, C, D, and E. Each group is assigned two days in office, two days remote, and one flex day, as described in the 2 + 2 + 1 Hybrid Working Model.

The 2/5ths Workforce Rotation is the most efficient system of rotation because it uses the least space possible and ensures the office is used to its maximum capability on all five business days. Using the example above, comparing a 2/5ths Workforce Rotation against a 1/2 Workforce Rotation:

• The 2/5ths system allows businesses to reduce the real estate footprint by 60% to accommodate employees in office, while the 1/2 system can only reduce the footprint by 50%.

• The 2/5ths model ensures that two teams are always in-office on any given day of the week, while the 1/2 model leaves the office under-utilized one day of the week.

• The 2/5ths model allows each team to interact with two different teams of people per week rather than limiting their in-office interaction to the same group of people every time.

SAVING MONEY WITH THE 2 + 2 + 1 HYBRID WORKING MODEL AND 2/5THS WORKFORCE ROTATION

Fewer people in the office equals less space required and less space equals lower rent and utility costs. Utilizing the 2 + 2 + 1 Hybrid Working Model and 2/5ths Workforce Rotation, office space can be reduced by 60%. With the increased space per employee metrics expected to become the norm following post-pandemic protocols, even when the amount of space per employee is doubled, using these workplace models still results in a 20% real estate cost savings.

For example:

CALCULATE YOUR POTENTIAL SAVINGS WITH 2 + 2 + 1 HYBRID WORK MODEL AND 2/5THS WORKFORCE ROTATION:

Pre-pandemic office model

# of Employees x Sq. Ft. per employee x Gross Rent x Lease Term = $Rent

Hybrid office model

2/5 of Employees x Sq. Ft. per employee x Gross Rent x Lease Term = $Rent

Your Savings

Pre-pandemic office model $Rent - Hybrid office model $Rent = SAVINGS

Given the strong possibility of increased space-per-employee standards, if a business does not add some form of remote working to its workplace model, more space will be required and real estate expenses will increase. In other words, if you can add the 2 + 2 + 1 Hybrid Working Model and 2/5ths Workforce Rotation to your workplace model, now is the time to do it.

Moving to the 2 + 2 + 1 Hybrid Working Model and 2/5ths Workforce Rotation is an effective strategy for achieving significant savings in real estate. Going back to the pre-pandemic office model, doing nothing, lets a considerable opportunity slip away. Downsizing your real estate footprints with the 2 + 2 + 1 Hybrid Working Model and 2/5ths Workforce Rotation is the path to reduced business costs.

CONCLUSION

The global pandemic has presented businesses with an unprecedented opportunity to reimagine and redesign workspaces to support: organizational priorities, remote working strategies, physical distancing, collaboration centres, and cost savings. The compulsory work from home conditions of 2020 demonstrated that technology and the workforce are ready to function remotely and introduced a shift in the where and the how we do business.

With thoughtful strategies like the 2 + 2 + 1 Hybrid Working Model and 2/5ths Workforce Rotation, the new office model represents a positive step forward into a better post-pandemic era.

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i “Canadian Workforce of the Future Survey.” PWC Canada, www.pwc.com/ca/en/today-s-issues/upskilling/canadian-pulse-survey.html. Accessed 5 Mar. 2021.

ii Boland, Brodie, Aaron De Smet, Rob Palter, and Aditya Sanghvi, “Reimagining the office and work life after COVID-19.” Mckinsey & Company, 8 Jun. 2020, www.mckinsey.com/business-functions/organization/our-insights/reimagining-the-office-and-work-life-after-covid-19#. Accessed 28 Feb. 2021

iii “Nearly Half of Employees Now Working from Home Want to Stay Remote, Study Finds.” PR Newswire, 14 May 2020, www.prnewswire.com/news-releases/nearly-half-of-employees-now-working-from-home-want-to-stay-remote-study-finds-301059220.html. Accessed 28 Feb 2021

iv Marr, Garry, “Young Canadians Are Embracing Remote Work, Survey Finds.” CoStar, 28 Feb. 2021, CoStar News - Young Canadians Are Embracing Remote Work, Survey Finds. Accessed 7 Mar. 2021.

v Lund, Susan, Anu Madgavkar, James Manyika, and Sven Smit, “What’s next for remote work: An analysis of 2,000 tasks, 800 jobs, and nine countries.” Mckinsey & Company, 23 Nov. 2020, www.mckinsey.com/featured-insights/future-of-work/whats-next-for-remote-work-an-analysis-of-2000-tasks-800-jobs-and-nine-countries. Accessed 1 Mar 2021.

CoStar Canada 2020 Year in Review

The COVID-19 pandemic left its mark on almost every facet of society in 2020, making 2020 one of the most unprecedented years in recent history:

• Industrial real estate was resilient and, in some markets, thrived in 2020. Options to find big box industrial space remained limited while developers and investors continued to be challenged to deliver enough new product.

• Hard-hit bricks and mortar retail saw an acceleration in the disruptions it was already experiencing over the last few years.

• Office faced the greatest uncertainty as a large part of the tenant base across the country worked from home.

• Real estate transactions stalled in the wake of the pandemic, but distress was limited.

This year-end report will discuss in detail these developments and how each sector is adapting to the “new normal”.

CoStar August 2020 Market Report Ontario

With Ontario now in stage 3 of its reopening plan, social distancing measures have gradually eased and business activity is picking up. As the peak of summer has arrived, the Canadian economy is showing signs of a stronger rebound than initially expected due to nationwide business re-openings and increased consumer spending, but make no mistake, there is still a long and bumpy ride ahead. With the first wave of infections behind us and many of the new cases confined to localized outbreaks, the country is still holding its guard up as surging cases in the U.S., and even globally, provide a stark reminder of how fast things can quickly change. Latest GDP figures from May indicate that the economy was able to post another monthly gain, at 4.5% compared to April 2020, but still down 15% compared to February 2020. The rebound can be partly attributed to the $392 billion, or 17% of GDP, in fiscal aid that the federal government provided in its response to COVID-19, however, the generous stimulus package will be felt for generations to come as the federal debt load will now surpass $1.2 trillion. If there is any consolation, the Bank of Canada has indicated that interest rates will remain low for the foreseeable future, ultimately reassuring households and businesses to move ahead with major purchases or investments over the medium-term. Unfortunately, with many of these fiscal aid programs begin to wind down, the coming months will be critical for the economy as many businesses and households, who have relied on lines of credit or loans to make ends meet, will be forced to determine if they are able to continue on their own without life support.

Government officials are now faced with finding a balance between economic sustenance, personal safety and personal freedom while real estate owners and operators across every asset class are considering potential longer-term effects of the outbreak. Along with damage already inflicted, the prospect of a second wave will ultimately determine the true extent of these transformative and lasting changes in corporate and consumer behaviour. But while the full scale of human catastrophe and economic impact is yet to be seen, consumers are clearly seeking the light at the end of the tunnel. Ontarians have shown an eagerness to go out in public, often at the risk of spreading or contracting COVID-19, so it seems likely they will return to restaurants and shopping when they can. This was particularly evident as retail sales across Canada rebounded sharply after historic declines in March and April as May saw sales up almost $42 billion or 18.7% from April’s record low. Preliminary forecasts for June suggest another strong gain with a flash estimate predicting a 25% increase, which would effectively bring total sales back to February levels. As is the case with so many aspects of society during these times, the outlook for retail sales will ultimately depend on the virus trajectory and timelines surrounding the vaccine. With larger sectors of the economy reopening and lockdown restrictions being lifted, temporary relief to retailers is a welcome by-product but one that carries risk that increased social interaction could lead to a resurgence in cases and a reversion to lockdown procedures, as seen in several U.S. states.

From a fiscal point of view, municipalities across Ontario are now facing the prospect of large operating deficits due to the heightened need for municipal services and the simultaneous drop in revenue streams. Growing deficits could put provincial infrastructure investments at risk as the government may be inclined to cover these deficits using provincial capital budget, reducing funds available for new projects and necessary ongoing operations and maintenance. The alternative is for municipalities to downsize their workforces and cut costs adding to total job losses precipitated by the pandemic and further eroding services available to the public. And with large expected declines in both provincial and federal GDP, the response to this crisis will have long-term implications for growth.

Marked by peaking rental rates and record-low vacancy amidst seemingly unappeasable demand, Toronto’s office market’s pre-pandemic outlook was robust and promising. And although it is largely insulated from the recessionary effects of a pandemic, the lockdown has muted leasing levels, led to an uptick in sublease space and forced occupiers to rethink how they use their office space. Nearly all firms postponed transactions that weren’t driven by lease expiry as large-scale leasing was essentially non-existent in Q2. Complexities associated with a lower density office environment and business continuity plans have taken center stage as tenants are now turning their attention to re-entering their spaces while factoring in social distancing, symptom monitoring, availability of PPE and strict adherence to regulations. The multi-year trend toward densification has reversed sharply while public health officials may amend building codes to limit the risk of future pandemics affecting standards for HVAC, square footage per person, and enclosed space ratios. With reduced tenant competition and more options on the market for potential occupiers down the road, it is likely that rent growth will level off this year and certain submarkets could potentially see negative growth by year-end. Reduced investment activity lends credence to this expectation with acquisition capital temporarily freezing and minimal foreign investment activity entering the market.

Toronto’s industrial sector seems poised for sustenance through the pandemic as well as potential late-year growth. Manufacturing, production, maintenance and supply chains are still among the most essential services and provide an opportunity for revenue during a time of uncertainty. E-commerce sales have spiked driven by demand for the delivery of essential items and groceries while there is renewed demand for dark kitchens and order fulfillment warehouses. Owners and tenants alike will need to coordinate closely with the public sector to forge plans that are essential to both public safety and the solvency of their workforce, while keeping the lights on in their operations. This will be particularly relevant to manufacturers of critically important components, parts and finished goods, especially those involved in critical infrastructures such as energy and power, transport, communications and food and agriculture.

The deterioration of Toronto’s retail sector has been swift and the true extent of the damage to the economy could be widespread. The shutdown of all but essential stores added further strain to several years of weak retail sales, rising property taxes and the shift to e-commerce. Even with the increases in May and June, Q2 2020 will go into the books as among the worst ever for retailers. The key consideration is whether the sharp rebound will be sustained in the coming months or the pace of spending growth will slow with millions of Canadians still out of work, government aid winding down, and restrictions on some businesses likely to linger. The retail industry might have effectively reached a tipping point with the pandemic, allowing e-commerce to emerge as the logical successor to traditional brick-and-mortar models. Due to the lockdown and warnings to avoid high-traffic indoor areas and places without proper ventilation, many shopping malls and underground pathways have seen a large reduction in shoppers. Depending on the governmental decrees, neighbourhood streetfront retailers may actually find their foot traffic not significantly reduced, as the perception of safety is higher within this retail subtype. Assets in retail nodes with necessity-based retailers, primarily grocery and pharmacy, will likely find that their consumer traffic remains relatively high. Notwithstanding that, tech giants like Amazon and Shopify continue digitalizing the industry and driving consumer behavior to e-commerce channels, further diminishing hope of a recovery for traditional retail performance.

Ottawa’s office market showed strong fundamentals in Q1 and the launch of the Confederation LRT line last year will provide some buffer to the uncertainty surrounding the pandemic. That being said, leasing activity slowed significantly in Q2 with overall market activity expected to stay stagnant over the short term. Businesses are putting major decisions on hold with many tenants expected to lean towards shorter-term extensions rather than committing to a long-term renewals on leases that are set to expire. Some may choose to vacate or attempt to sublease out space to reduce costs associated with their existing real estate obligations. The pre-existing disconnect between potential demand from the office sector and existing supply will be interesting to monitor; a key driver being whether the government divests some of their real estate in favour of longer leases with the private sector to spur economic development or chooses to renovate their current inventory. This all points to office vacancy climbing for the rest of the year although the market’s reliance on the federal government could mean Ottawa could fare better than other markets.

The National Capital Region’s industrial market has entered a period of unprecedented uncertainty. Some further degree of vacancy increase is expected in the coming quarters, along with an easing of rental rates. In the past, the lack of big box space available for lease meant that built-to-suit was the only viable option for most large occupiers. Now, with the looming economic impact of COVID-19, new speculative construction is unlikely in this already risk-averse market. For large users, built-to-suit may continue to be the best option if the market softens. However, the industrial sector is expected to be fare better than others as the importance of online shopping and other elements of distribution and supply chain have seen a spike in demand. Although overall activity has declined and vacancies have edged up, prospects for the Ottawa industrial market remain strong. With a strategic location to service both Ontario and Quebec, Amazon and Shopify have shown their interest in establishing a presence in the region, prompting several transportation and logistics users to follow suit and pursue large industrial footprints.

Ottawa’s retail market is experiencing catastrophic declines similar to those seen in Toronto and cities across the globe. Retailers were struggling before the coronavirus pandemic began and the impact has simply lessened their chances for survival. With consumer shopping habits bound to change and retailers needing to adapt to remain financially viable, focusing on consumer needs and building loyalty has never been more important. Retailers with modest or no online presence are moving quickly to change their business trajectories. The pandemic has accelerated the rise of e-commerce and with risks of a potential second wave, consumer loyalty to e-commerce is likely to continue rising. As a result, brands are increasingly pivoting to a direct-to-consumer business model and many e-commerce businesses are experiencing sizable growth. The long-term impact of COVID-19 on the retail sector will largely depend on the potential emergence of a second wave as well as the duration and severity of the outbreak going forward.

These insights are made possible through CoStar, the largest commercial real estate source for property listings for sale or lease in Canada.

This post may include "forward-looking statements" including, without limitation, statements regarding CoStar's expectations or beliefs, which are based on our current beliefs and various assumptions concerning future events and circumstances that are subject to change. Actual results and events may ultimately be materially different. All forward-looking statements are based on information available on the date published, and we assume no obligation to update these statements. You should not construe this post as investment, tax, accounting or legal advice.