A major myth permeating the North American office market today is that the pandemic and the resulting work-from-home experiment was solely responsible for prompting a significant reduction in office utilization by employers.
However, data suggests that the rate of office utilization had been on a steady secular decline in North America years before the pandemic even started.
To illustrate, the accompanying graph shows that U.S. office utilization — or the amount of occupied office space per office worker — was relatively stable prior to the Great Recession in 2008. But since then, it steadily declined by an annualized rate of 1.4% between 2009 and 2019. Following the pandemic in early 2020, the annualized decline in office utilization accelerated to 7.5%.
To be sure, office utilization often momentarily increases during the start of a recession, and the brief downturn induced by the pandemic in 2020 was no different. But this dynamic is largely due to large-scale job cuts that cyclically occur during downturns. This situation tends to initially leave firms having more office space per employee than they require before “right-sizing” occurs following a recession.
Notwithstanding this cyclical dynamic, several explanations account for why office utilization has been on a long-term secular decline in North America. The most important factor is the growing dominance of knowledge workers in the economy. Knowledge workers engage in non-routine tasks that are not dependent on where they do their work. The creativity and innovation that drives their productive output is mainly produced by cognitive processes that can occur whether these workers are residing in a traditional office, a home or even a golf course.
Rapid advancements in technology and communications have facilitated this ability to “work from anywhere” even if that knowledge worker is employed in an organization with many other people. Indeed, any professional who responds to an email about important work-related information at a Starbucks with an iPhone or Blackberry understands that they are still engaging in productive work.
Knowledge workers can be thought of as synonymous with traditional office workers because they tend to work in fields that are endemic to office-using industries such as technology, finance and professional services. As the corresponding chart shows, these office-using sectors have been the biggest drivers of employment growth over the past two decades.
Talent shortages and demographic pressures arising from an aging labour force are often found in these sectors, too. Moreover, many consultants and self-employed professionals are found in these fields and it is no surprise that the growing prominence of co-working was partly driven by the growth of these independent workers who did not necessarily require a traditional office.
It is also important to mention that the trend toward office densification as a key cost-saving technique was increasingly employed by numerous firms over the past decade. In fact, squeezing more office workers in smaller spaces and refraining from pre-leasing office space ahead of employee headcount growth helped in the recovery of many firms who financially struggled following the Great Recession.
Although office-utilization trends are similar across major North America markets, it appears that office utilization has been dropping at a faster rate in Canada, both before and after the pandemic. Although data limitations preclude a more extensive historical analysis, the differences prior to the pandemic could be largely attributed to the Calgary office market — Canada’s second largest office market. The deep downturn in that region following the collapse of oil prices in 2015 left many Calgary office buildings empty.
With office utilization rates already very low in Calgary, the increasing deceleration of office utilization in Canada following the pandemic is more likely to be driven by Canada’s other office markets and especially its largest: Toronto. Office availability in Toronto’s financial core has increased from around 4% prior to the pandemic to a current 17%. But even in Toronto, office utilization was decelerating prior to the pandemic, down by 13% between 2013 and February 2020. The falling rate of office utilization in Toronto was likely being driven by the same forces related to knowledge workers.
There are no conclusive reasons why Toronto is now experiencing a more rapid rate of deceleration than the U.S. following the pandemic. However, some plausible explanations include: long commutes and reluctance to use public transit are keeping more Toronto office workers away from the office, and growing adoption of standardized hybrid work policies among Canada’s major banks, whose headquarters are in Toronto.