Shopify has decided to offer its newly-built massive office space in Toronto for sublease. The office area is spread over 348,103 square feet and includes seven floors, a residential area and a retail complex. Named ‘The Well,’ the property owned by Allied Properties and RioCan had expected Shopify to be the major tenant.
In December, Shopify abandoned its plan to move to the new office space at The Well. The Canadian e-commerce giant clarified that the sudden change of plan is not caused by increased expenses but because of its remote-first approach.
We have a bold vision for the future of work at Shopify, and are no longer a workforce that centres around a physical workplace for day-to-day work.
Alex Lyons, Spokesperson, Shopify
Vacant Offices in Toronto
However, Shopify’s change of plan affected the office market in Toronto, which is already struggling with vacant office spaces. With rising costs, businesses prefer to offer remote work and unload unneeded physical space. This cost-cutting measure is leaving newly-built office skyscrapers vacant.
The remote work culture was adopted by many businesses during the coronavirus pandemic in 2020. Shopify was among the first prominent tech companies to offer remote work, calling itself a “digital by default” company.
“As of today, Shopify is a digital by default company. We will keep our offices closed until 2021 so that we can rework them for this new reality. And after that, most will permanently work remotely. Office centricity is over,” Shopify CEO Tobi Lutke tweeted in May 2020.
As of today, Shopify is a digital by default company. We will keep our offices closed until 2021 so that we can rework them for this new reality. And after that, most will permanently work remotely. Office centricity is over.
— tobi lutke (@tobi) May 21, 2020
The Globe and Mail cited research data from commercial real estate firm Altus Group claiming that the office vacancy rate was 16 percent in Toronto last year. It is even more than the figures during the Great Recession in 2008-09 and four times higher than the pandemic-hit 2020.
Apart from Shopify, the Canadian Imperial Bank of Commerce is also willing to unload large chunks of office space. It has also put around 400,000 square feet of office space spread across five buildings on the sublet market.
What Modern Employee Wants
With advancing technology, real estate owners had expected a rise in the office vacancy rate in Toronto. However, the recent numbers are way higher than their expectations. The modern workforce does not want to work from the office five days a week. While many companies are now offering completely remote work, some are allowing their employees to spend a part of the workweek at home.
Consulting firm Strategic Regional Research Alliance found in research that the office workforce averaged 38 percent of pre-pandemic occupancy levels in December. The firm added that Wednesday has marked to be the busiest weekday in most of the offices. On Wednesdays, the office workforce averaged 52 percent of pre-pandemic occupancy. Monday, on the other hand, was the slowest day as per research data with 24 percent of pre-pandemic occupancy.
Work Beyond Physical Workplace
When Shopify shunned its plan to move to The Well office in December, its spokesperson Alex Lyons told Toronto Star in an email interview that Shopify does not rely on a conventional physical workplace.
“We have a bold vision for the future of work at Shopify, and are no longer a workforce that centres around a physical workplace for day-to-day work,” Lyons said.
“We recently made the decision not to move forward with developing a new office space at The Well. Shopify continues to value highly intentional, in-person gatherings, and will continue to do so at our primary Toronto space located at King Portland Centre, with plans to further develop and expand into one central space to accommodate our needs,” he added.
Lease Obligations: The Well Tower
According to The Globe and Mail, the Canadian e-commerce company is bound by a 15-year lease agreement that obliges it to pay regular rent for the office space. Developers of The Well Tower, Allied Properties and RioCan, have the right to sue Shopify in case of not paying rent.
Lyons didn’t clarify if Shopify is willing to pay a break fee or pay regular rent after backing out from moving its office. However, Allied chief executive Michael Emory told The Globe and Mail that Shopify has not defaulted its lease obligations.
“Shopify is paying the rent and it will not be allowed to break its lease, nor is it trying to break its lease. Shopify is a reputable and honourable organization, as are Allied and RioCan,” Emory said.
It all started in 2018 when Shopify announced that it would acquire 254,000 square feet of office space at The Well. The company is allowed to expand its asking possession to 434,000 square feet. The current office space used by Shopify — the King Portland Centre — is also co-owned by RioCan and Allied.
The research conducted by Altus Group claims that 11 office towers with a combined space of 6.7 million square feet have been built in the last two years. The research added that the office vacancy rate in Toronto reached 15 percent by the month of September. It was just 4.2 percent in 2019.
The data added that 14 new buildings are under construction in Toronto, which would add 4.86 million square feet of office space.
Shopify’s Bid to Recover From Past Losses
According to Toronto Star, Shopify’s shares plunged over 70 percent in 2022. It was a year full of ups and downs for Shopify as it laid off 10 percent of its workforce in July. CEO Lutke blamed it on an overestimated “bet” on booming e-commerce during the coronavirus pandemic.
“Shopify has always been a company that makes the big strategic bets our merchants demand of us – this is how we succeed. Before the pandemic, ecommerce growth had been steady and predictable. Was this surge to be a temporary effect or a new normal? And so, given what we saw, we placed another bet: We bet that the channel mix – the share of dollars that travel through ecommerce rather than physical retail – would permanently leap ahead by 5 or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match,” he said in a statement.
“It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead. Our market share in ecommerce is a lot higher than it is in retail, so this matters. Ultimately, placing this bet was my call to make and I got this wrong. Now, we have to adjust. As a consequence, we have to say goodbye to some of you today and I’m deeply sorry for that,” the CEO added.
