It's no secret that Canada's office market isn't doing so hot. Vacancies are still way above pre-pandemic levels, and some big companies like Shopify are giving up their leases altogether. In the US, where similar dynamics are in play, the value of some commercial buildings have been marked down by as much as 80% in fire sales by panicked landlords.

Should we be worried about our own office real estate market? Brian Rosen, President and CEO of Colliers International's Canadian arm, joins us to explain what's going on in Canada's office real estate market, how landlords and tenants are responding, and what impact it's all likely to have on Canada's economy.

Sarah Bartnicka:
Hello and welcome to another episode of Free Lunch, the podcast where we talk to people way smarter than us about the topics that matter most to Canadians across business, economics, and policy. I'm your co-host, Sarah Bartnicka.

Taylor Scollon:
And I'm Taylor Scollon.

Sarah Bartnicka:
So Taylor, today we're here to talk about offices, and particularly one thing that's caught my attention is office vacancy rates, which we're seeing this slow return to office kind of, but the vacancy rates are sitting pretty high. I think one number that stands out to me is the over 15% office vacancy rates that are affecting Toronto's downtown office core. And what I'd like to get to the bottom of today is whether or not that is as bad as it seems. I mean, what is your take on what's happening in offices right now?

Taylor Scollon:
Yeah, I mean you see all these articles and headlines about what's going on in the US around commercial leases and you see people writing down the value of buildings by like 50% or more in some cases because the vacancy rates are so high. And even some talk of this potentially leading to some sort of financial crisis in the states because there's so much lending from regional banks that are already under stress. But yeah, I'm curious about how that applies in the Canadian context, whether there's similar risks here or whether it's sort of a completely different scenario, which is something that we've seen before in previous office episodes that we've done on the differences in our banking system with the American system. I wonder if commercial real estate is a similar situation.

Sarah Bartnicka:
Totally. And I admit that I have not until recently realized just how broad the implications are of a struggling office sector when it comes to real estate. So I thought we'd have on someone who is truly the perfect person to talk about this. Brian Rosen is the president and CEO at Colliers in Canada. Colliers of course, is a leading commercial real estate services and investment management firm in Canada, but they're a fixture here and all around the world. So Brian, thank you so much for taking the time and for joining us on Free Lunch.

Brian Rosen:
Glad to be here.

Sarah Bartnicka:
We're hearing that offices are really struggling right now. What is the high level view of what's happening across Canadian markets right now?

Brian Rosen:
Yeah, it is a hot topic for sure. So there's a couple of things happening. So vacancy is up from where it was so a little bit of history. Prior to the pandemic office vacancy in Canada was actually at an unhealthy low amount. So it was actually really, really low levels of vacancy. A healthy market is somewhere six to 8% of vacancy, and we had areas of the downtown cores and cities excluding Calgary that were in the 2% range sometimes. So it was really actually tough to find space. And then you compound that with a historical lack of investment in developing new class A offices in Canada where you had a whole history where offices just weren't being built and you ended up with this supply issue. So all of a sudden fundamentals are there, Canada's growing, office vacancy is really low, let's go build some offices.
So we start building some offices. It's a multi-year cycle and what happens? The pandemic hits. And so people are all sent home. So now you have these compounding factors of people who are working in a more hybrid fashion. The hybrid working has always existed, but now it's more commonplace in more firms combined with inventory coming onto the market in a substantial way for the first time in a long time period. So you have all these class A, AAA offices, these great offices coming on. Some of the suburban lower end offices coming off the market, but you have all this inventory coming, you have people working more remotely, you end up now with vacancy in the major markets at around 10% plus. So that's the current situation where it sits.

Sarah Bartnicka:
So what's the breakdown across cities? Like which ones are faring better and worse than others?

Brian Rosen:
Everything's focused, Calgary obviously, it's been a tough market for several years now. So it still sits at a different level. It's sort of when the prognosticators talk about what could happen in the worst case scenario, unfortunately the Calgary market is looked upon as, what if things go to 30% vacancy, et cetera. There's still within that market, there's still a flight to quality. There's still a much lower vacancy amongst the Class A and AAA offices. The best of the best offices will still attract a higher tenancy than they will in other offices. But that's in one end of the spectrum.
Vancouver, which is currently around 10%, is still the lowest vacancy for a major market pretty much in North America. It's still the envy of other markets in North America right now. So Vancouver's still, I mean when you go to Asia and Europe it's different, but North America it's still a great market and Toronto not that far off. Toronto in the 10 to 12% somewhere in that range, Montreal's a little bit higher, probably 13, 14% a little bit higher than that. So generally speaking in that double-digit range, it changes with sublet availability coming on the market with just things are pretty much more fluid these days than they were. So the numbers I'm quoting you aren't necessarily exact numbers, but they're directionally correct.

Sarah Bartnicka:
Can you just explain to us what a double-digit vacancy rate means? Is that cause for panic?

Brian Rosen:
Absolutely not. It's not cause for panic. Now what it means in a healthy market, as I was saying earlier, it's around that six to 8% where you find there's enough inventory to give tenants an ability to have some choice, but there's not so much that there's a glut and the landlords are out there and just trying to get anybody in the office as possible. Now the trend is obviously not going in the right direction in these markets because there's supply coming on as I mentioned, and right now tenants are looking at their options and saying, do I need as much space as I had? So they'll look at it and they say, my people aren't coming in as often. More than they were last year, but not as often still, do I need as much space? And so they're ending up renewing at the same space if they're growing or they're downsizing potentially.
And then that's the warning sign is that it's not going down. Vacancy is not going down. Vacancy has been going up each quarter. And so I think that's where it has the market a little bit uncertain about what the future of office is because we're seeing the trend going in the opposite direction and landlords are now providing more incentives to get tenants in the door. And that's the first step towards the market changing from being a pure landlords market to being more of a tenants market in terms of finding opportunities.

Sarah Bartnicka:
One more follow up on this is that you mentioned that landlords are offering incentives, but we haven't seen rents come down still. Why hasn't that happened?

Brian Rosen:
That would be the last thing usually that would happen. So you keep your face rent, at stabilize, and there are a couple other things. So first of all, sublets are available in the marketplace, so some of that vacancy is sublet availability. That's how when we think about in the grand scheme of things, how much is available? Well, there's the actual pure leases, and we also track the sublet. So sublet is a portion of that availability. So we don't track that in the rent prices, but that will have an impact because you're paying less usually in the sublet because the actual tenant wants to just find someone to pay for the space. But the incentives that will typically come, a lot of it is tenant improvement allowances. So the cost to re-outfit a new office is not cheap. It will cost several hundred dollars per square foot depending on what part of the country you are.
In the US, I've heard stuff upwards of 500 a square foot in places like New York. That is expensive. So the landlord will offer an incentive by saying, we will give an allowance for a certain amount of dollars per square foot that will go towards capital improvements. So your new space, sometimes you're taking over stuff from the 1980s, 1990s, it's old tired space. You want to outfit it with this new way of working, more collaboration zones, more amenities, all the stuff we read about, that takes money. So the first incentive is the landlord puts that in there. And you end up getting what's called the net effective rent is when you take into account, you hear people in real estate refer to NERs, the NERs start going down because the cost that the landlord is now paying in a different form in terms of a capital improvement allowance will lower what they're actually getting from the rent.
So they get the actual dollars in rent, subtract out some of the capital allocation. That's the first thing. The rent is the other part. There's one other factor though. I mentioned flight to quality. So as more A and AAA offices are being built downtown core, that increases the rent. When you take out of the inventory, some of the lower class buildings, B and C class buildings that were charging twenties instead of 40, the average goes up. So you get a little bit of a mix issue in addition to incentives being on the capital side versus rent reductions. So factoring together when you see the incentives go up, that's the first sign that you're seeing some of the vacancy challenges hit the landlords in a way that they think is not easily changeable.

Taylor Scollon:
So you hear about companies like Shopify giving up so much office space, and it seems like a real sign of weakness. So I was kind of surprised to hear that the vacancy rate is only a few points above what would be considered a healthy market in places like Toronto and Vancouver. What do you think accounts for that strength right now?

Brian Rosen:
Strength, I wouldn't use the word strength. It was why isn't it worse than it is? Or why hasn't it gotten better? There's a couple factors behind that. One is timing and confidence. So a lot of people aren't making decisions yet because they aren't confident about what the future is. So they're looking at their operations and they're saying, okay, I'm growing by 10% potentially. I'm making up a company. Shopify is not a good example with their recent announcements, but we're growing by X percent, but our people are coming in now 60% of the time or 50% of the time. So I actually need less space overall. However, I do have to now reconfigure my space to make it more meeting rooms and a more common area. So that takes up more space. What am I going to do? You know what? I need another quarter to make a decision.
I need another quarter on top of that. So instead of starting on a 24-month cycle, they actually start kicking the can down the road. And by the way, all those decisions are compounded with, oh, maybe I can save some rent by going to the suburbs. Oh wait, it's still going to cost me several hundred dollars per square foot to re-outfit my location. So you're back to that little loop and that cycle of I don't know what to do. So decisions aren't necessarily made on a lot of leases yet. So people are either renewing or finding the renewing sometimes shorter term, they're renewing the same space or they're doing some slight downsizing but not massive. So there are those examples of the massive ones. There also are companies taking lots of space too. So there are 80,000 square foot leases being signed, a hundred thousand square feet.
Colliers signed for 65,000 square feet in Vancouver, which was the same amount of space that we had. We moved the location. So I've signed six leases in the middle of them. Not just as a real estate homer, like my people, we needed space and we're growing. So a lot of that, why hasn't it accelerated more? More decisions need to be made. So we could see it go one in either direction. If the economy or the decisions on space start changing a little bit, maybe people won't take as much of a reduction. But if this hybrid stays really, really sticky where we're at, you may see some more reductions in vacancy further climb.

Taylor Scollon:
On the question of timing, what is the typical term for a commercial lease? I think most people are familiar with residential leases, which are a year and then month to month, but I assume that's not the case for a commercial lease. What does that look like?

Brian Rosen:
After spending several hundred a square foot to outfit the place, heck no. It depends. So the larger the size, typically the longer the duration. The average terms will be anywhere from five to 10 years. That's really where you'll see, depending on the size of the location, how much you have to put into it from a capital perspective and how much optionality you want on growth. A lot of times you'll have extensions built in as well. So you'll do a five year with a five-year extension or a multi-year extension. So that's typically how it works.

Taylor Scollon:
So I mean, we're coming up on more than three years since the pandemic started. Is there a concern about a wave of leases coming up for renewal and companies just saying, you know what? No, we don't need this or we're downsizing, making those decisions all at once?

Brian Rosen:
Yes and no. I would say, let me answer that question slightly differently. Is there a concern about companies taking less space? Yes. Is it a concern that it's going to happen all at once? No. I mean the natural nature of it is there's a roll. Every year there's a certain amount of leases that are coming due, and it just is the nature of office leasing. During 2020, landlords were very much... So 2019, if you asked for an extension with a 2% vacancy, good luck, good luck. You were in called an overhold situation, you had to pay rent times 150. Landlords held all the cards.
In the middle of the height of the pandemic, you asked for an extension for more time when no one was in an office and they weren't allowed to come to the office, landlords were very much partnering with the tenants in a very fair... You didn't hear a lot about evil landlords kicking out tenants during the middle of the pandemic because it's a community. They know they need tenants. Tenants know they need landlords, and it was very fair. But now we're coming out of that. Now it's a more normal transactional cycle. So there's going to be an ongoing annual roll of leases, and you have to make a decision. If you don't make that decision, you have to either extend, renew, downsize, or take new space.

Sarah Bartnicka:
I want to ask you about the role that workers and what workers want are playing in all of this. We just saw a round of pretty strong jobs numbers, which I imagine will give workers a bit more power, a bit more time with the power that they had. So what has been the impact of a tight labor market on the slow return to offices?

Brian Rosen:
I think it's playing a big role. So historically, your employer just sets the terms and conditions of your... I mean this wasn't even a discussion point a couple of years ago, right? Well, actually, let me rephrase. It goes in waves. If you remember Marissa Miller from Yahoo, when she took over as CEO coming in, there was a whole big to-do about the remote working and that whole thing and how that did and didn't work. Someone on our Lex Perry who leads our marketing nationally found a clipping from the nineties about the death of office due to remote work. And I'm surprised they didn't say the interwebs. Back then, everybody was on AOL and Prodigy and CompuServe or whatever it was. So it goes in cycles.
But right now, we are in a cycle with a very tight job market and with people knowing that they can function because we were all thrust into this experiment. And we all figured out, yeah, we can do it for some jobs, a lot of jobs, a lot more jobs than historically been understood. So the leverage is definitely in the hands of employees in a different way than it was before where they were able to say, oh, you want me to come in, and I don't want to come in. I have three job offers waiting for me. And so that's definitely had an impact on employers doing more mandates because there are a lot of executives at companies that we speak to that say, I wish I could ask my employees to come in more in a more strong way than they do.

Sarah Bartnicka:
So how does this bring us to this idea of earning the commute, which is something you brought up the last time that we chatted. What are companies doing now to earn the commute?

Brian Rosen:
Well, that is a big, big thing that we said. So part of the challenge in Toronto in particular where we've seen the most delayed return to occupancy. So I talk about vacancy in the beginning of this, vacancy is different than occupancy. So you can have a vacancy at 10% of a building, but buildings only occupied 40%. And that's a warning sign because if a building's only occupied 40, 50%, chances are those tenants are not going to want the same amount of space. So that's, by the way, what we didn't talk about is that's why no, no trades are happening, nobody's buying and selling buildings to a large extent because they don't know what the value of the building is. Is it going to be fully leased? Is it going to be smaller? Is it going to be built? The value of an office asset is very unknown.
So getting back to your question, so the people earning their commute, a city like Toronto, which has brutal commutes, that is something where an employee goes, wait a second. So you're telling me I have to spend two hours to three hours a day driving, and I can spend that time doing work. And yeah, we're not building as much of an interactive culture and friendly and happy, but I'm getting my work done. Even if it's less productive, even if it's 20% less productive, I'm saving three hours a day. And so it becomes a real challenge to say, well, your productivity's down. Yeah, but I'm working more hours in the grand scheme of things. So that earn the commute, how do you get people in to overcome that mentality and say, it's worth it for me to spend three hours because of everything else. So how do you do that?
Amenities. Amenities have been the big, big focus for landlords, for tenants, occupiers. How do you build an amenity rich culture, whether it is gatherings, whether it is building amenities, whether it is amenities within your office or a city level ecosystem amenities. So you're building a mixed use environment that encourages people to want to come in because they go to a whole system of downtown that makes it fun and interesting. That's how you earn that commute. First I had to explain what earned the commute meant, and then get into actually what employers are trying to do and what landlords are trying to do.

Sarah Bartnicka:
Are people worried about what will happen if companies fail to earn the commute? And of course, in talking about the downtown economies and the restaurants and the businesses that occupy other types of commercial spaces down there, what happens? And are people worried? Because Toronto hasn't gone back to even close to the vibrancy that we used to see before the pandemic, the hustle and bustle that we were used to.

Brian Rosen:
It's a big issue. The hustle and bustle is much higher on the Tuesday through Thursday. Wednesday in particular, you go down to the path in Toronto and it's pretty much packed. And Monday is tough and then Friday is really tough in most of these locations. So landlords are definitely concerned and so are retailers, and so is the city. I mean, you look at the retail. People take for granted, oh, I can just go downtown and go to a restaurant. Well, if your whole retail infrastructure starts caving because you don't have the people flooding in on an ongoing basis, well a lot of firms are hanging on, and you're not set up to do three day a week retailing.
So retail is set up for the most part, for five day a week. And it's not easy to just say, well, just change your business model, innovate, disrupt. It doesn't work that way. You have a store. You have to hire employees. And to have it be surge, demand three days a week and depressed demand two days a week is a very hard business model. And so it is impacting retail, and there is a worry that the ecosystem won't be able to continue to be as vibrant and wonderful as it is if we don't get some more activity downtown.

Taylor Scollon:
In some of the softer markets, are you seeing any spillover effect in other areas of commercial leasing like retail where maybe rents for retail locations are starting to fall or you're seeing more incentives for retail renters because of the weakness in the office market?

Brian Rosen:
Not yet. In a broad way, in fact, retail overall spending has been strong. People are still spending money. Obviously a recession, which is a high likelihood a recession coming, that could impact it as well because it's multi variable with retail, right? One is the traffic, foot traffic, but the other aspect of it is actually people just spending. So we haven't seen a lot of bankruptcies go through. That's the thing. We haven't seen a lot of distress yet in the Canadian market, in commercial real estate full stop, office retail, et cetera. It's a different setup. You're going to read about stuff in the US where landlords are giving the keys back. It's a whole different setup with the lending here and the type of loans, but the distress hasn't been there as much as we think it should be in some regards.

Taylor Scollon:
Well, that's a good segue, I think, into trying to understand some of these differences between the Canadian market and the American market, because you're right, we do read these stories all the time about questions about systemic risk that commercial real estate maybe presents to the financial sector in the US through some of these regional banks in particular. How does that stack up to the situation that we have in Canada?

Brian Rosen:
We're 100%, this is from I'm a New Jersey guy originally. I'm a dual citizen, but growing up and spending half my life in the US, it is different. Now we're linked. So anybody who says, well, we're completely insulated and fine, that's not true. But our banking system is completely different than the US and commercial real estate lending, which is a cornerstone of how you do any transactions in real estate, you need your lending just like in resi, it's very different. It's much more the regional banking has a much more significant portion of the real estate loans in the US. Here, if it's not the big five doing lending, there's a certain amount of the Lifecos, the pension funds, the private institutions like the CMLS and Romspen and ICI, the lending here is far more concentrated and bigger. And the systemic risk is much, much lower. And the conservatism of how Canadians loan as well is from a commercial perspective, not the same as in the US. So the US likely will feel a worse impact of the banking failures and other things.

Sarah Bartnicka:
Can you help me understand how the average Canadian, let's say, what their exposure is to office buildings outside of the ways that we conventionally think about it? I think of the way that maybe pension funds invest in real estate, there's assets that you can buy into like REITs. What is an everyday person's exposure to the real estate market and specifically the office real estate market that might not be just like them going into an office?

Brian Rosen:
Yeah, yeah. No, it's a good question. I think one of the ways is the pension funds and the RSP and the other investments, there's a certain amount of allocation of funds from on the balance sheet or funds that the big pensions, the OMERS of the world and the HOOPPs and the other ones that are investing in teachers, et cetera. All these big pension funds are investing in real estate as a percentage of their overall investment allocation. So if OMERs has a hundred billion dollars, there's a certain percentage of that that's going to go toward real estate. And then of that, they have a certain percentage allocated to the office asset class, and it will differ depending on each pension fund and each setup.
Some of them have more of an industrial bent than some of them have. And they distribute their money all over the place. So the pension funds are invested in individual assets, they're invested in broad portfolios, they're invested in funds supporting private equity firm. So the long story short is those funds are allocating. The simple answer is a lot of those funds where people have their RSPs and pensions that are investing in real estate as a percentage of their overall investment dollars. That's one thing. As an individual you can also buy a REIT or you can buy that on the publicly traded market place. Just buy a equity, buy a mutual.

Sarah Bartnicka:
Can you tell us, for listeners that might not know, or for hosts that need a refresher, what is a REIT?

Brian Rosen:
Real Estate Investment Trust. Effectively, it is a vehicle to give people access, private individuals or investors access to real estate that they wouldn't normally be able to invest in and get the same level of returns. So real estate delivers a certain IRR, a certain level of return. Real estate has a certain level of counter cyclical nature versus other investments in other parts of the market. But real estate's really expensive. So I can't go out there and buy a hundred million building. So well, it depends on how your advertising is on the podcast and if I get a share of it, so maybe that. But I don't have access to that.
So how do I get some of those returns? Well, that's what the REITs are there for. The REITs are there to invest in real estate, and then they don't really pay much in terms of taxes. And they pass through the returns adjusted cashflow, the AFFO, the free cash that they are able to pass along to investors. So they deliver a wonderful yield. You buy a REIT equity and you get a dividend, and that dividend is effectively the return that you get for investing in a real estate asset you wouldn't be able to get, normally. You're basically a fractionalized owner of those assets.

Taylor Scollon:
I'm curious about this question about the value of these buildings. You mentioned earlier that it's very uncertain how to accurately value them right now. How do you see that changing? At some point to get this market functional again, you think we need to come up with some sort of consistent way that we're going to value these things. How is that going to firm up?

Brian Rosen:
Some of it just based on transactions. The market, as always, is the ultimate arbiter. How do you value a house? What's someone willing to pay for it? And right now, no one's doing anything. And so right now it's really hard to value any asset because what happened was interest rates went up, lending went up, and people were uncertain, okay, what's actually the true value of this asset? Any asset, industrial, residential, you look at the fundamentals, you look at your cash flow and you say, this is what I can get, but what's it actually worth? Because now my lending has gone up, my debt costs. So what's the true value? Well, it's ultimately worth what someone wants to sell it for and what someone wants to buy it for. So that right now in the market, you're seeing a lot of in all assets, the buyers are going, hey, I want it for this.
And the sellers are going, nah, nah, I want it for this. And there's a called a bid-ask spread. And so that's one of the bingo words we're using in real estate right now. There's bid-ask spread, dry powder, pivot. There's a lot of terms being thrown around. But on the office class in particular, people are unclear. How is hybrid working going to impact ultimately the vacancy rates? And is this a short term blip where in two years, one year, et cetera. And look, RBBC announced four days a week. Other firms are announcing. IBM announced it. So we're seeing our occupancy is up without even doing strong mandates. We have people just coming in. So it's certainly moving there, but right now, no one knows what it's going to be. Our office is going to be 20% vacant, 25% vacant, or 10%.
10%, great, things will start trading quickly. So some of this will be who's going to make the first step, who's going to be the bold one that takes the first movement? Then others will follow, and then it goes fast. Then once someone goes, okay, the market's now been set, now we know how to trade. Office will still be probably trading the least out of all the major assets right now because we talked about the pension funds and the REIT, they want to diversify their asset holdings. So they probably want to reduce some of their exposure in office asset class to get into other better performing ones.

Taylor Scollon:
Right. And are lenders sort of pulling back as well?

Brian Rosen:
Yes.

Taylor Scollon:
Because of this uncertainty?

Brian Rosen:
They're pulling back all over the place. I mean the US, it's even worse. Here the lenders are very, very tight on some of its regulatory, but some of it is uncertainty on what the value of the asset is.
Therefore, they don't know how to. If you don't know if the asset's going to be worth 100 or 80, you have to figure out your loan to value. You don't know what it's going to be. So you're just saying not right now, I don't want to take that risk. And so in office it's being even more cautious. The lending on office is hard. But look, well capitalized firms with good track records, some of them don't need a lot of bank financing. They have their own capital, and they're going to be the first into the market, the private.

Sarah Bartnicka:
So considering everything we've just talked about, is it safe to assume that not a lot of commercial office space is being built right now across the country?

Brian Rosen:
I'll reframe that a little bit. There's a lot being built because the building cycle is many years. And so you look behind me, and you can see a crane. And I think that's CIBC Square. So that's going to go up for the next couple of years, still, the second tower. You have the other towers being built, and Vancouver, you have multiple towers being built. And you have ones being built in Toronto and some in Montreal, et cetera. So once that cycle completes though, I think the root of what you really wanted to ask was, is there going to be more stuff going into the ground? And the answer is much less. So what's being purchased now to say, I'm going to go build a class A office tower, you're going to see much less. Once this cycle is done, we're good for a little while. You'll always see opportunistic situations because location and dynamics in city, and there's always multiple factors. But no, generally speaking, we're done for the office major builds for once this cycle is complete.

Sarah Bartnicka:
Looking to Calgary, because something we've heard about a lot is that some of the office buildings are getting rezoned to make way for residential space. So I guess is that a solution that only happens once your vacancy rate is 30%? Or will we see something like that happen elsewhere? Is it that easy to just swap the assets between categories? Because it seems like it isn't.

Brian Rosen:
It's not. I'd like to turn my car into a bike, my Harley turn it into a mini, like go for it. No, I mean that's probably a little too extreme an analogy. And no, I do not drive a Harley. Do I look like a Harley guy? You never know, never know.

Taylor Scollon:
Never know.

Brian Rosen:
But the answer is it will be select. So there's a couple of things. One, residential towers and office towers are structured very differently in terms of floor plates, in terms of HVAC, plumbing, it's just set up very differently. And even where they exist in a city, the open air and the light, it's just usually not set up in a way where it's easy to convert one to the other. Some can, some can't. It's not cheap. It's a long process. Rezoning takes a while to do as well. The other thing is cities don't like giving up employment lands. That reduces a tax base.
So to do that, they really have to be convinced, and that's your point about vacancy, that we're over, oversupplied. And therefore, keeping that office there will never have a tax. There's not going to be anybody that's going to be occupying that office anyway. So the concept is yes, when it gets to a critical zone, that's when it starts happening for sure. But really, it's not easy to do, and there's select opportunities. So I think in Calgary, there's about a billion dollars being allocated, the city is really helping it because without their support, it's very hard to do on a just pure proforma basis by an owner. We're helping a couple to go through it right now.

Sarah Bartnicka:
Does the selection process have anything to do with the class of the buildings? I guess, is it the lower class buildings, that would be the first ones to get kind of emerged for potential residential development and it kind of just goes that way? And I guess...

Brian Rosen:
It's a variety of factors. I mean, I think that the stuff that's getting the big attention in the news of the towers, the downtown stuff, the big ones that are really empty in creating that, because if you take those out, that takes a lot more of the supply off the market. So if you take a 30,000 square foot office off the market, that's not really doing much to dent the vacancy. If you take a million square foot office tower off the market, that actually has a meaningful impact on vacancy. So that gets the news. But the low hanging fruit are those suburban offices a lot of times that have a better zoning potential to even industrial. So depending on the location of some of these offices, you potentially can get an industrial. It doesn't only have to be residential.
The reason why residential is so hot is because we have such a supply shortage of residential and housing. And usually where an office is more likely to be a residential type zoning. But we've seen the industrial conversion too, for sure. But yeah, low hanging fruits the smaller, worst class out in the burbs area, but the ones that catch the attention to make the most meaningful impact are downtown CBD, central business district.

Taylor Scollon:
This might be asking you to think about too many hypotheticals, but in a worst case scenario for the office market where we don't have people coming back three days a week, remote work is here to stay or even becomes more common. What happens to all these towers in downtown course?

Brian Rosen:
Real estate CEO predicts Armageddon.

Taylor Scollon:
Yeah, yeah. I'm trying to get a clip here.

Brian Rosen:
Yeah, absolutely. Absolutely. It's hard for me to answer that because I just think so many things have to go under for that to happen. Now I know there's other people who have a different point of view as me, but I feel the way the Canadian immigration is working, we're putting more and more people into the country. If we don't create jobs for those people, that's going to be a whole social issue. So assuming we still continue to create jobs over time and people come in, that's going to grow our employee base, that's going to grow our company. If the economy grows, we're going to need people to go somewhere. I happen to think we're in a cycle where hybrid is definitely here to stay, but our final resting point is going to be more in office than we are now. Lower than pre-pandemic, but more than we are now.
So what will that mean for space? Well, when people are coming in, there's more population. So a company's going to be growing. It's going to need maybe again, less lower square foot per person, but you still need space. So it'll start sorting itself out by the fact that we're not building more office. And the dynamic between the US and Canada, one of the reasons it's different is we don't really have, and this is no offense to any secondary cities, we don't really have many secondary cities. I grew up in New Jersey, you drive an hour in each direction, you get a city two hours, sorry, two to four hours, you get cities of multimillion people. So from New Jersey to New York to Boston, to Philly to Baltimore, I mean it's all within several hours, DC. Here it's like the GTA, you got southwest Ontario, the Waterloo area, and then it's like five hours to Ottawa. So we don't have this outlet for offices.
In New Jersey, you drive down an hour from where I lived and you got Princeton had a huge office complex, and then Philly's an hour from there and et cetera, et cetera. So I think the dynamics of the fact that if we stop building a bunch of offices, we're going to catch up. So even in a worse case scenario, I think we'll catch up.

Sarah Bartnicka:
So what are you watching in the short term? Because I guess from a worker perspective, I guess it doesn't seem that bad. It's like, we're seeing kind of the big banks, the big law firms, people are kind of going in, that'll probably push more people to go in. So you're working three days a week, the office is maybe a little bit nicer because people are trying to get you to go in. It doesn't seem like it's, I guess going to be that bad from a worker perspective. But what are the measures that you're really looking for in the short term to assess how offices are doing and what can listeners look out for to see if the recovery is kind of shaking out?

Brian Rosen:
The key is not getting caught in headlines one way or the other. So you're going to hear probably people in my profession installing the virtues of all the positive macroeconomic factors of there's limited supply, this, that, and the other thing, and whatever it is, of all the different things that are saying why things are going to be fine eventually. And then you're going to have the people who catch onto a Shopify or something else doing something, and it's like the whole world's going to hell. Or go, Hey, this company walked away from six buildings in New York, therefore all of Canada's going to be at 40% vacancy. So I think the first thing for listeners is don't get caught up. Do your homework. Read a couple of articles. That doesn't mean you have to spend all day being an equity analyst, but read the full article.
Don't just read the headline because oftentimes in the middle of the article there's more meat that actually will explain the nuance of this because this is nuanced. I think that's one thing. We're looking at occupancy as a big, big thing. So are people actually following that trend? Have we leveled off at stasis or is it actually going to start increasing a little bit more? And where is the eventual stasis of occupancy on days of the week, et cetera. Another thing we're looking at is the recession and job cuts. Because as companies start downsizing, that will absolutely impact office needs, always will. No cycle, no anything. You can't ever deny the fact that if you have fewer people, you're going to likely need less office. And so that's part of why there's been a pause in the market too, is there's a lot of companies are saying, do I need this?
Do I not need it? As they evaluate their human resources situation. So we're really watching that. And then we watch for sort of sub markets and signals on certain things. Where are we seeing traction on certain types of clientele? The technology sector in particular is a leading indicator for us. The small sized companies, the five to 10,000 square foot, 15,000 square foot office needs. Those really are a bellwether of how the economy is doing and what space needs are. The big ones will move at their own pace, but the small ones will give us a sense. So those are some of the indicators. Cell phone data, that tells you how many people are downtown, walking, trafficking, we track some of that stuff. So those are some of the leading indicators.