Building owners, property managers and other Ottawa commercial real estate insiders itching to get a sense of which assets the federal government plans to offload from its downtown office portfolio in the wake of COVID-19 will have to wait a little longer.
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Building owners, property managers and other Ottawa commercial real estate insiders itching to get a sense of which assets the federal government plans to offload from its downtown office portfolio in the wake of COVID-19 will have to wait a little longer.
Five months after a senior federal official told a crowd at the Ottawa Real Estate Forum that the government expected to release a list of surplus holdings early in the new year, the feds have yet to announce which properties they plan to sell.
Public Services and Procurement Canada – the department responsible for leasing and managing much of the federal government’s office footprint across the country – said last month it’s still “consulting with internal stakeholders, including client departments and agencies,” before unveiling its long-term commercial real estate strategy for the National Capital Region.
“The disposal of surplus real property is a process that can take several years,” the department added in an email to OBJ. “The condition of the building, its environmental impact, function, use and financial performance are all considered as part of this process.”
That means local real estate executives will continue to speculate – and perhaps place a side bet or two – on which federal government office holdings in the nation’s capital could be deemed expendable.
“They’ve shot a cannonball up into the air,” says longtime broker Darren Fleming, “and nobody knows when or where it’s going to land.”
Still, Fleming says he’s not surprised the feds are taking their time deciding which buildings to put on the auction block.
“I think they’re trying to be cautious, but it may just be delaying the inevitable,” says the CEO of Real Strategy Advisors, who represents commercial tenants.
As the region’s largest employer and property manager, the federal government occupies an outsized role in the Ottawa real estate market. Virtually anything it does with its portfolio has a ripple effect throughout the rest of the industry – an inevitable fact of life when you own more than 20 million square feet of space and lease an equivalent amount, as the feds do in Ottawa-Gatineau.
In October, PSPC officials said they expect to divest about 15 to 20 per cent of their office space nationwide, which would equate to as much as eight million square feet in the National Capital Region.
Fleming, however, thinks those estimates are conservative.
“Depending on how you slice it, the feds are going to shrink (their office footprint) by 25 to 50 per cent,” he predicts.
During times of economic turmoil such as the recession of the early 1990s and the dot-com bust a decade later, the federal government jumped to the Ottawa office market’s rescue, Fleming says.
Now, with the feds seemingly committed to a hybrid work model, civil servants won’t be flocking to occupy empty floors the way they did in the past.
“Eventually, the jobs came back and people refilled the office space,” Fleming says. “That’s just not going to happen this time.”
But even before the pandemic fundamentally changed the way people work, the feds were looking at selling off aging real estate assets in the downtown core as part of a plan to shed buildings that were near the end of their life cycles and instead put their resources into newer, more energy-efficient properties.
“This whole talk of the feds coming out of buildings, it’s nothing new,” says Jeff Brown, a vice-president and broker at Colliers International who has been working in the city’s commercial real estate industry for more than 30 years.
“I think from a market perspective, we’re dealing with so many other uncertainties that this is just one on the list.”
The issue, another longtime industry executive says, comes down to simple economics.
“At some point, something’s past its useful life and you’ve got to consider alternatives,” says Michael Church, the managing director of Avison Young’s Ottawa office.
“What do we do with building X on an entire city block downtown that’s past its useful economic life? Well, the short answer is you sell it or you don’t. At some point, somebody’s got to make the call.”
Brown and other industry experts note that many of the federal government’s largest office complexes, such as L’Esplanade Laurier and the C.D. Howe Building at 240 Sparks St., date from the 1970s and require tens of millions of dollars’ worth of repairs and upgrades to meet modern environmental and air-quality standards.
Not surprisingly, those two buildings are among the sites most commonly mentioned as top contenders to land on the feds’ “for sale” list. But just how attractive they would be to potential buyers is up for debate.
Brent Arseneau, vice-president of leasing at real estate firm Colonnade BridgePort, estimates that it would cost about $60 a square foot to remediate the one-million-square-foot C.D. Howe Building to current health and safety standards – a $60-million pill that would be tough for most developers to swallow.
“There are significant costs attached to any of this stuff,” Arseneau says.
Converting empty office space to residential units is another option that’s gaining traction in cities with spiking vacancy rates such as Calgary.
Ottawa Centre MP Yasir Naqvi is among a growing number of local business and political leaders who think the same idea could work in the nation’s capital.
Last fall, Naqvi travelled to Calgary to get an up-close look at how developers and municipal officials in Alberta’s largest city are working together to convert large swaths of empty office space into housing – something he believes we’ll see a lot more of in Ottawa in the coming years as the feds start to shed some of their downtown holdings.
But some real estate insiders aren’t so sure.
Citing L’Esplanade Laurier and the C.D. Howe Building as examples, Arseneau says L’Esplanade Laurier has a host of structural issues that would likely require it to be gutted and rebuilt virtually from scratch, while the C.D. Howe Building’s 50,000-square-foot-plus floorplate is too large to be effectively divided into apartments.
“There would be a lot of challenges,” he explains.
Brown echoes those doubts.
“There’s always talk about residential conversions, but I’m of the belief that a lot of those buildings are not going to be conducive to a residential conversion,” he says.
So what to do with structures that are too costly to renovate and don’t lend themselves to other uses?
Some industry leaders say it might be time to consider a more radical alternative – at least by the conservative standards of the nation’s capital.
“I think the theory that’s been rolling around (for L’Esplanade Laurier) is you just have to blow that place up and then develop a better plan for new buildings,” Arseneau offers.
Brown says he also thinks demolition might be the best way to deal with aging federal properties that are no longer economically viable to maintain.
“I’d like to see a bunch of buildings probably come down, to be honest, and kind of start fresh,” he says. “I think that needs to happen, but I don’t know if it will. If it’s taking down a 12-storey building to put up a 25-, 30-storey building, then I think the economics may be there. But the history of this market is to just basically carry on with what’s there and hope for the best.
“I think it will be the status quo, unfortunately.”
