Q: What trends are you keeping an eye on in Ottawa real estate in 2023?
There’s a number of things we’re watching. One is clearly what’s happening with the office market, specifically downtown. As we all know, we’ve come through the pandemic and everybody is trying to figure out what this new kind of hybrid work looks like to them. I wish I could say that it was sorted and it wasn’t something that we’re watching closely, but it clearly is something that’s having an impact on the office market.
The other thing we’re looking at is, we’re a big landholder in Ottawa with the intent of building purpose-built rental and right now, market conditions both on the equity and debt side are a little bit challenging. We’ve gone through a period of increased construction costs due to supply chain and labour (issues), as well as a significant increase in interest rates, which is impacting construction financing. So it’s a relatively challenging market to actually develop in right now.
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We’re big believers in Ottawa long-term and we think this is a temporary spot we’re in in the market. But, nevertheless, we were hoping to have a number of projects on the go by this time already this year. We’re working hard to see if we can get a proformative to make sense to get projects started, because certainly on the side of purpose-built rentals, we’re seeing significant demand and a real disequilibrium between supply and demand. There’s a bit of a disconnect in the market that we’re hoping to take advantage of, quite frankly.
Q: What are some of the challenges for real estate companies in the Ottawa area?
There’s a shift in how people are using office space. I wish you could say that there’s really one consistent kind of approach, but it’s all over the map, both public and private sector. Tenants are looking at the challenges that they are facing getting employees back and trying to find the right balance between bringing people into the office and allowing people to work remotely. And so I think we’re still 18 to 24 months out before that really starts to take shape, something that we can predict and measure.
I think the office market is going to be challenging for the next couple of years. It’s a bit exacerbated in Ottawa by the federal government and what’s happening with their return to office, but I think the lack of clarity around what the feds are doing is making it particularly challenging, just because they’re such a significant tenant in the Ottawa markets.
I think the private sector is a bit clearer in terms of moving forward with expectations in terms of hybrid and what’s going to be each company’s view as to what the appropriate hybrid kind of approach is. We’re starting to see private-sector tenants make some commitments and they’re further ahead figuring this out than the federal government is. So I think that the big challenge for the office market is the uncertainty … it impacts values and impacts liquidity and it impacts cash flow. So you have got to be a really strong operator these days to make sure that you’re maximizing cash flow from your property, especially when you’ve got exposure to the federal government. So I think the office market is going to continue to be challenged.
On the development side, especially as it relates to purpose-built rental, we’re seeing a real disconnect because there’s huge demand but not a lot of new supply, given the cost escalations and that kind of thing of development margins on projects. So we’re in a really kind of strange time as it relates to development for purpose-built rental.
Q: What about some of the advantages and opportunities locally?
I fundamentally believe that in the market long-term there’s going to be lots of demand and I don’t think we’re going to be over-supplied. I’m very confident in our ability to get back to development. I just think it’s going to take some time, into the latter part of Q3, Q4 and potentially into 2024, before we start to see developers starting to get back into full-on development mode.
There’s a disconnect in the market right now. There’s a lot of concern about what’s happening in those different sectors and commercial real estate and with good reason. But if you understand the market and you’re a big believer in the long-term prospects, it’s probably a really good buying opportunity. Values have certainly come off, especially if you’re buying with less debt and more cash. I think there’s a significant buying opportunity and, on the development side, for multi-family.
There’s also a really significant pent-up demand and a real lack of new supply and I think that those who get going sooner than later are going to be the beneficiaries of being bold when the market’s a bit skittish. You’ve got to look at the long-term trend and, if you’re a believer in it, which we are, then you should be active and take advantage. That’s kind of our view.
Q: How has the behaviour of your Ottawa-area clients changed in recent years? What trends have you noticed from businesses regarding leasing, investment and development habits?
On the equity side, both in terms of high-net-worth investors and institutional investors, I would say generally what we’re seeing is that the institutions tend to act relatively consistently. There’s not a lot of compensation for being first and taking a bunch of risks. The market is perceived as being risky right now, so they’re raising money, but they’re being very cautious about how they deploy it. I think there’s a significant amount of pent-up institutional capital that’s going to be available and they’re kind of sitting on the sidelines, taking a wait-and-see attitude.
Those that own assets are not panicking and they’re not selling. They know it’s going to be bumpy for a while, but they can weather the storm and they’re not going to take a hit on the valuation of an asset because they’re not in a panic to sell it. They’re patient on both sides of deploying capital and repatriating capital, because values are off. So they’re looking for opportunity on the buy side and they’re looking for a deal; they’re patient and are not sellers because valuations are off. Assets that they’re selling might be inside a closed-end fund and, if it’s coming to its sunset date, they’ll just extend the fund versus selling into a down market.
There’s lots of private and institutional optimism about long-term prospects for Ottawa but lots of uncertainty in the short-term. Nobody’s really doing a heck of a lot right now. It has to be a screaming good deal on the buy side and it’s patient capital on the sales side.
Q: What do you see as the future of the federal presence in Ottawa?
Well, it has a significant impact. You know, they control 50 per cent of the inventory in the market and so they’re by far and away the single largest tenant and so as they go, so too do the markets. They’re an important element of what happens in the markets and I don’t think they’re doing themselves any favours. Treasury Board came out and said everybody should be coming back a couple of days a week. It’s not happening to the same degree we expected when the Treasury Board announcement came out in March and we’re not seeing building occupancies increase that dramatically. And so my view is that we need more leadership from the federal government on this. It will get itself worked out over time, but it’s taking longer than it should and, as a result, the Ottawa office market specifically is disproportionately impacted because of the lack of clarity around the federal government strategy around its people and hybrid work policy.
