City's commercial real estate market to improve in 2015: Colliers International

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After a forgettable 2014 for the city’s commercial real estate market, a major Ottawa appraisal firm says there’s nowhere to go but up.

“We’re looking forward to 2015,” Colliers International valuation expert Oliver Tighe said Tuesday morning after the firm released its market overview for the fourth quarter of last year. “We think there’s going to be a lot of capital infusion into the Ottawa real estate market to reposition buildings, get tenants in place. Ottawa’s strong. It’s got a lot of big, attractive developments, we’ve got a huge infrastructure project (with light rail coming in 2018). I think 2015 is going to be a better year than 2014.”

Commercial sales activity tanked in the capital last year, the latest Colliers report shows, with only 111 sales of more than $500,000 – well below the 149 transactions on the books in the previous year and significantly lower than the 10-year average of 159.

In total, 2014’s transactions were worth a total of $838 million, 16 per cent lower than the $997 million tally from 2013 and 9.6 per cent below the 10-year average total value of $927 million.

“There’s a divide between what vendors want for their assets and what buyers are willing to pay,” said Mr. Tighe. “Good-quality assets are heavily sought-after. The problem is, lower-quality, average-quality assets have challenges with vacancy, poor tenants, poor locations, deferred maintenance. The demand for those isn’t the same. (Buyers) want much higher risk premiums, they want much higher cap rates and they want much lower prices per square foot.”

While the Colliers report says “the demand for good-quality assets in Ottawa remains strong,” he said owners of more sought-after properties are in no hurry to unload them.

“They don’t really see why they should sell,” Mr. Tighe said. “They like their asset, it provides a good stream of income and there’s not really that many alternate real estate investment opportunities in Ottawa, so they think, ‘What’s the incentive here?’ They’re simply not selling.”

The retail sector suffered the steepest drop, falling 35 per cent from 34 transactions in 2013 to just 22 last year. The total value of those deals plummeted 63 per cent from $290 million to $108 million.

Still, the quarterly report says the retail market remains strong, thanks to low vacancy rates, major expansions at the Rideau Centre and Bayshore Shopping Centre and new projects such as the Tanger outlet mall in Kanata.

But Mr. Tighe cautioned that Target’s exodus from Canada will soon flood the market with tens of thousands of square feet of vacant space. He sees few potential replacement tenants eager to fill that void.

“I think there’s going to be a big chunk of retail vacancy, particularly in Ottawa,” he said. “I struggle to find alternate users. We can say GoodLife Fitness; we can say Giant Tiger … but I don’t think there’s as many potential users as there is available space.”

Ultimately, that will drive down rents, he added.

“It’s expensive to keep the lights on, it’s expensive to keep those places heated every month,” he said. “They’re costing the landlords money. So they’ve got to find ways to get tenants in them.”

The office and industrial markets also experienced dramatic declines in 2014, each falling about 30 per cent. The 23 office transactions marked the lowest total in a decade, with the average sale price per square foot dropping 23 per cent from $247 in 2013 to $191 last year.

But a couple of deals in Kanata – KRP Development Group’s $69-million purchase of seven buildings in Kanata North representing 400,000 square feet and Spear Street’s $32.5-million acquisition of the BlackBerry portfolio – provided a glimmer of hope, said Colliers senior broker Warren Wilkinson.

“The office market this year needed a good news story and I believe this is one of them,” he said of the KRP deal.

Mr. Wilkinson, who represents landlords, said federal government downsizing and a move toward open offices, shared desks and working from home have resulted in higher vacancy rates and lower rents, especially in the downtown core.

“Now, more than ever, system upgrades and sound management plans are vital to attracting tenants in a competitive leasing market,” he said. “We need to help partner with these groups in order to make their spaces more unique. Align yourself with LEED initiatives.”

The one bright spot in 2014 was multi-family units.

The sector’s total transaction value of $330 million was up 33 per cent over the previous year even though sales fell slightly from 47 to 42. Several national owners purchased apartment properties in Ottawa last year, and the city “continues to be a sought-after location for multi-family buyers from across Canada,” the report says.

“There is a low supply of condo-quality apartment rentals in Ottawa,” said Mr. Tighe. That has prompted major renovations such as InterRent REIT’s overhaul of its 201 Bell St. property, he said, while other landlords such as Minto have converted hotels to apartment suites.

“Part of this is happening because renters demand it – tenants are wanting higher-quality stuff – and partially because the condo market is struggling,” he said. “Private landlords who aren’t investing capital are going to lose tenants, and the well-managed, renovated buildings, well-located buildings, are going to keep tenants.”

Mr. Wilkinson agreed, predicting landlords who are willing to put money into their properties will see healthy returns in 2015.

“Those that remain idle will be left behind,” he said.