Lease signalled challenges facing landlords
A government-occupied office tower on the western edge of downtown Ottawa was a central fixture in both the city’s leasing and investment markets in 2012.
In January, landlord Morguard renewed its federal tenancy for an additional 12 years at what observers say was an aggressive rental rate. It signalled the early stages of a slowdown in the leasing market and was indicative of the concessions some say landlords will have to make over the next year to keep their buildings occupied.
With that lease in hand, Morguard sold the property several months later to GWL Realty for $143.3 million, the largest single-building deal of the year in Ottawa.
THE LEASE: “Precedent-setting” is how one observer describes the lease between Morguard and Public Works, which will keep the federal government at 200 Kent St. until Nov. 1, 2025.
Sources say the net rent starts at $18.50 a square foot and climbs to $21.50. With the tenant improvements tossed in, the net effective rent would work out to slightly less than $18 per square foot.
If that’s accurate, it means the feds signed a deal below the going market rate at the time, says one broker.
“That’s $3 or $4 below what I think class-A buildings should have been going for,” says Cresa Ottawa managing principal Darren Fleming.
“It is a reflection of the desirability of a fully occupied government-backed lease and the (challenges) Morguard would be facing if that tenant ever left.”
He says the Centennial Towers deal precipitated the drag on downtown rental rates for class-A space, a result of lacklustre private-sector growth, ongoing government austerity and Public Works’s upcoming moves into several newly constructed buildings.
Primecorp Commercial Realty vice-president Bruce Wolfgram says the impact extends beyond the core and into the suburbs, adding it will become much more visible in 2013.
“There hasn’t been that much official downward pressure on the numbers because there hasn’t been that much activity, relatively speaking,” he says.
“There is very little growth downtown at the moment … As more and more leases come up to expiration, we will be seeing much more pressure on downtown landlords to provide more concessions and lower their rates.”
THE SALE: The lease renewal substantially increased the value of the building, as it guaranteed its owners more than a decade’s worth of revenues.
Great West Life’s realty arm purchased the property from Morguard in the third quarter for $143.3 million, the largest local stand-alone building sale of the year.
Nathan Smith, vice-president of capital markets at Cushman & Wakefield Ottawa and a broker involved in the deal, says the property received an “overwhelming” and “higher-than-expected” number of bids, although he declined to provide a precise figure.
He says the capitalization rate – generally the ratio between the property’s net operating income and the purchase price – was a record low at “well below six per cent,” in part due to the below-market rents.
However, Mr. Smith notes there were three significant factors influencing the value of the building.
A federal tenancy represents virtually no credit risk, and the renewal added significant term to the lease. Furthermore, the property is in the central business district, a location that is highly sought after by institutional investors.
“It creates a situation where the asset is highly desirable in arguably one of the most stable markets in North America,” says Mr. Smith.
SIDEBAR: Who’s involved?
Philip Rimer from Fraser Milner Casgrain was the lawyer representing the vendor; Danny Grandilli of McCarthy Tétrault was the solicitor for the purchaser. Cushman & Wakefield’s Nathan Smith, along with Jamie Ziegel and Ashley Martis of TD Securities, were the brokers involved in the deal. The real estate arm of insurer Great West Life purchased the building on behalf of one of its funds, while Morguard sold it on behalf of Aurion Capital Management, the Healthcare of Ontario Pension Plan and Manitoba’s Civil Service Superannuation Board.
Centennial Towers: by the numbers
Size: 421,124 square feet
Source: BOMA Ottawa Commercial Space Directory
From the archives:
Campeau Corp. sold the Centennial Towers to Ticor Real Estate Services for $80 million in 1991. Ottawa-based Campeau was heavily indebted at the time and in the midst of selling off substantial portions of its portfolio, according to media reports from the period.
Morguard acquired Ticor in 1997.