Canada’s big banks are starting to get nervous about their balance sheets, and with good reason. According to the Financial Times, the Big Five have set aside large and growing sums of money to cover likely impending losses in the office real-estate market as the reality of a permanent shift to work-from-home sets in. Tenants in the office towers we have in cities like Toronto in many cases already massively downsized their footprints through the first years of the COVID-19 pandemic, and there’s been little to no sign of a serious resurgence of work in offices.
Things get worse still when forecasting the amount of office space that is currently under construction. An analysis by Altus Research commissioned by the Toronto chapter of the NAIOP (a trade group for office and industrial-park owners) found a likely oversupply of 40 million square feet of office space in the existing development pipeline right now. Only the most aggressive return-to-office scenarios under consideration — workers being back in their cubicles four or more days a week — would be enough to use up that surplus over a quarter-century. Anything less, with workers returning only three or fewer days a week, would still leave massive amounts of surplus square footage.
So let’s pose the first question: If you aren’t a bank shareholder or a commercial landlord, is this a problem we actually need to solve? There are arguments beyond just the special pleading of the affected special-interest groups we might want to consider — but, spoiler alert, I’m skeptical.
The most basic argument for some kind of intervention to restore in-office work is that our commercial office districts, especially the really dense clusters of office towers, support more than just white-collar office jobs. They support whole service sectors that existed to make those jobs more convenient and amenity-rich. Without the office clusters, everything from food courts to same-day dry cleaners struggle to stay open.
More prosaically, there are some basic municipal-finance problems to solve. Offices generally pay different taxes than homes do, and they require different types of services than other uses, so a major downturn in the use of offices is likely to affect municipal finances in big ways.
Another, less obvious, reason the government might want to support these clusters relates to the benefits of agglomeration economies. We’ve discussed this before, earlier in the pandemic, when the future of remote work was more uncertain. In short, downtown Toronto’s economy is more productive and active not just because of the sheer number of office jobs, but also because of the concentration of those jobs in one place. If remote work cannibalizes the density of work being done, the argument goes, that would harm the long-term economic growth of the city (and, by extension, since Toronto is so central to the broader economy, of the province and the country, too). The Centre for Cities, a think-tank based in the United Kingdom, earlier this month made a similar case for trying to preserve office work in London, arguing that failing to do so would do long-term harm to the national economy.
But even if we agreed that there were large benefits to getting workers back in offices and that those benefits were large enough to justify public-policy changes — then what? How exactly do we get workers back in offices? If employers think it’s extremely valuable to have workers in the office, they could, for example, pay workers a top-up to encourage them to come in — and to offset the substantial costs, in terms of both time and money, that workers incur on their commutes. If Canada’s large employers have been loud and enthusiastic about their willingness to provide such incentives to their employees, I’ve missed that chorus.
The government could also try to change people’s behaviour. And, indeed, that U.K. report argues that Transport for London should maintain high service standards on public-transport lines and perhaps offer targeted fare cuts to encourage commuters to make the trip to and from the office. Whatever the merits of this prescription in London, it bears no connection with the current reality in Toronto, where the city is looking at a yawning budget hole and has no credible plan to fill it. Neither the province nor the federal government seems in a hurry to come to the rescue with a bailout package that would be sufficient to allow for restored service, much less fare reductions.
So while, in theory, you could imagine employers or governments (or both) paying the substantial costs it would take to bring office work somewhere closer to pre-COVID levels, there’s no sign anyone is actually going to do that. And if governments were willing to, we’d need to have a serious discussion about whether this is even a remotely fair or equitable use of public money.
More dismal planning is probably necessary, then: we’ve simply got too much office space both in existence and in construction, and a lot of it won’t be needed for years, if not decades. In the context of a stifling housing shortage, this presents an opportunity: In cases where conversions would be cheap and fast, we could turn offices into homes. Where conversion isn’t an option, we could demolish old offices and replace those with homes. Toronto and other cities have policies designed to discourage this; developers are basically forced to preserve office-space square footage in the name of preserving an imagined balance of jobs and homes. Whatever merit those policies had pre-COVID, they’re just totally inconsistent with the reality of 2023 — and cities should suspend or repeal them altogether.
Will there be long-term costs to accepting work-from-home as the norm? Almost certainly, and I’m sympathetic to arguments that the fallout from undoing the benefits of agglomeration could be substantial. But if neither employers nor governments are willing to pay the costs for the alternatives, what do we expect workers to do?
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