Competition heats up downtown as Morguard launches build

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Additional inventory to put downward pressure on rents, observers predict

One of the city's largest landlords is pushing ahead with construction of a 22-storey office tower at the corner of Elgin and Gloucester streets after pre-leasing less than a third of the space.

Some industry observers predict Morguard will encounter short-term challenges securing tenants, as competing landlords make aggressive offers to fill vacant space in their properties. However, but say Ottawa's stability makes the building an attractive long-term investment.

The project at 150 Elgin St. should be good news for tenants, who will have another option when shopping for downtown space and benefit from the increased competition between landlords.

Shoring and excavation work, estimated at $8.4 million according to city records, is underway on the site, which sports a three-storey building that used to feature Friday's Roast Beef House.

Canada Council for the Arts has leased between 25 and 30 per cent of the building and will take the second, third, fourth and part of the fifth floor.

The remainder of the building is being targeted "primarily to the private-sector market," according to a city report, although Colliers International vice-president Paul Bennett, who is marketing the space, notes the federal government "is always welcome."

There are currently several companies and organizations said to be in the market for significant blocks of space, although some may choose to renew in their present buildings. These include KPMG, Ernst & Young, BLG, the Canadian Institute for Health Information and the Bank of Canada.

The vacancy rate in Ottawa's notoriously tight downtown office market has been creeping upwards over the past year or so and currently sits at slightly less than six per cent.

The rise has been aided in part by the availability of several large pockets of space. One of the most prominent vacancies is inside the Sun Life Centre, in which records indicate more than 140,000 square feet is sitting empty between the two towers.

Meanwhile, Gillin Engineering is said to be spending $25 million on refitting its 446,000-square-foot tower at Gloucester and O'Connor streets, recently vacated by Export Development Canada.

The Crown corporation, meanwhile, is marketing three floors, totalling more than 80,000 square feet, within its new headquarters at Slater and O'Connor streets. There are also two floors, totalling approximately 28,800 square feet, available inside the Telus Building at the corner of Bank and Slater streets.

The EDC and Telus spaces are being offered for sublease, which usually comes at a lower price than direct vacancies and puts downward pressure on market rents.

"All of a sudden, competition for these big tenants is getting fierce, and it is going to get fiercer," says Darren Fleming, managing partner of brokerage firm CresaPartners Ottawa.

Sources say there is evidence downtown landlords are already offering deep discounts to would-be tenants. The Department of Justice, which recently took 60,000 square feet inside Place Bell at 160 Elgin St., is said to be paying a net effective rent - which includes incentives such as fit-up allowances - of well below $20 a square foot.

At least one competing bid for the federal contract was also rumoured to be below that threshold.

Bruce Wolfgram, a vice-president and broker at Primecorp Commercial Realty, says net effective rents for downtown class-A space in Ottawa typically range between $22 and $24 a square foot.

Colliers' Mr. Bennett says the published asking rate for Morguard's building at 150 Elgin St. is $29 a square foot, which would be reduced depending on the size of fit-up allowance. One broker, who asked not to be named, said the net effective rent on a proposal for 150 Elgin St. was $24.50 a square foot.

Mr. Wolfgram says most tenants he talks to are cost-conscious and unwilling to pay a premium for office space in the current economic climate.

"Unless (Morguard) is aggressive over the next 12 months with their marketing, it might take a while to fill up their building."

"(But) Morguard has the deep pockets to wait until they get the right tenant mix. It may turn out to be an excellent move," Mr. Wolfgram adds, noting Minto's 180 Kent St. was constructed a few years ago without any committed tenants and, while it "didn't fill up overnight," the 19-storey tower is now fully leased.

Colliers' Mr. Bennett concedes tenants looking to move into space in 2012 and 2013 have a variety of options, but says there is already strong interest in Morguard's new building from potential tenants eyeing a 2014 occupancy.

"We have so little vacant space downtown ... (150 Elgin) provides a much-needed alternative to tenants whose leases are expiring 24 months from now."