Ottawa, Insider Only Real Estate

Feds’ pledge to speed up office offload means they’re ‘not coming back’ downtown: broker

April 17, 2024

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The federal government’s pledge to invest $1.1 billion over the next 10 years to divest its office holdings more quickly is the final “nail in the coffin” for any hope the region’s largest employer will reclaim most of its pre-pandemic real estate footprint in downtown Ottawa, a prominent local commercial broker says. In their budget tabled Tuesday, the federal Liberals said the new funding will help “accelerate the ending of leases and disposal of underused federal properties” as well as “address deferred maintenance” at federal office buildings. Public Service and Procurement Canada, which owns and manages much of the federal government’s real estate portfolio, has already stated it plans to reduce its office footprint by up to 50 per cent in an effort to lower operating costs and cut greenhouse gas emissions. The department owns about 65 million square feet of office space, including more than 40 million square feet in the National Capital Region. It estimates about half of it is underused or vacant and says it is planning a “significant disposal effort.” “This would enable more office buildings, particularly in urban areas, to be converted into homes for Canadians, while also ensuring the responsible use of government resources,” Tuesday’s federal budget document says. The government estimates that reducing its office footprint could save it up to $3.9 billion over the next decade. “What that means is, they're not coming back to the downtown core,” Darren Fleming, CEO of Ottawa-based commercial real estate brokerage Real Strategy Advisors, told OBJ on Wednesday. “They’re being very clear in this budget about what the intent is, and it’s not to be reoccupying privately owned buildings in the downtown core anytime soon. The fact that they even give lip service to doing it faster may be a reaction to the incredible amounts of pressure and questions from industry.”

Office reconfigurations

Fleming said he expects much of the new funding will be spent on modifying properties the feds intend to continue occupying to make them better suited for hybrid work. “I can tell you, a lot of construction companies and a lot of furniture vendors are very happy with the fact that they’re doing complete reconfigurations,” he said. “If you sell furniture, if you sell IT infrastructure, this is awesome.” Hugh Gorman, CEO of Ottawa-based property management firm Colonnade BridgePort, said that as a taxpayer, he’s “glad to see there’s some austerity being demonstrated by the government around better utilization of their space and the tax dollars that go to support that.” Gorman, whose firm manages several office buildings that house federal government tenants, conceded it’s “concerning” for the commercial real estate industry to see the feds pushing to end leases sooner. “It’s obviously going to impact our market,” he said. “But at the same time, it’s also good to see that they’re working on a strategy and there’s a plan. I think the private sector is exceptionally good at adapting and deploying capital in a way that’s risk-adjusted.” Gorman said it’s hard to predict what impact the feds’ office pullback will have on the local market until more details about the plan are revealed. “What we need to know as an industry is exactly what are you doing, where are you doing it, when are you going to do it by,” he explained. “They’ve got to be transparent about what they’re doing, and they’ve got to give the market an opportunity to respond to it.” The government’s latest move could add even more inventory to a downtown Ottawa office market that already has a vacancy rate above 11 per cent. There is a growing push to convert some of those empty, outdated office towers into housing projects. A number of office-to-residential conversions are already underway in the city’s core, and the feds indicated in the budget that they’d like some of the space they offload to be redeveloped for residential purposes. “Where applicable, the government will prioritize student and non-market housing in the unlocking of federal office properties,” the budget said. Tuesday’s announcement comes almost a year after PSPC said it was planning to sell a number of aging office properties in the city. The department’s disposal list of 10 Ottawa buildings includes notable properties such as the L’Esplanade Laurier complex and the CBC’s former headquarters at 1500 Bronson Ave. PSPC has provided no recent updates on its plan to offload local office space. Gorman said the new measures outlined in the budget could be a signal it’s poised to speed the process along. “I think what you’re hearing from them loud and clear is they’ve got to cut through the red tape and get this stuff moving, and that’s their intention,” he said. “I applaud that. Even if it’s potentially going to have a negative impact on the commercial real estate market in the short term, those are clearly the right things for them to be doing.”