New government builds to add pressure to class-B landlords

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With the first of five new government office buildings scheduled for completion this year, local real estate observers are watching which departments are starting to pack their bags - and what properties they'll leave vacant behind them.

The Department of National Defence is expected to leave the 11-storey Constitution Building, located at Rideau Street and King Edward Avenue, for the new 12-storey building under construction at 455 de la Carriere Blvd. in Gatineau on Nov. 1.

By the end of 2014, the federal government will take delivery of more than two million square feet of brand-new office space as construction is completed on three Gatineau offices, a new building at the Train Yards and the redevelopment of 90 Elgin St.

Furthermore, DND is expected to gradually start consolidating its space in the former Nortel campus later this decade.

And that, according to some, should worry local landlords with older and outdated office properties.

"Any of the class-B and class-C landlords are the ones at risk," says Darren Fleming, managing principal at brokerage firm Cresa Ottawa.

Federal bureaucrats occupy a mix of leased and government-owned office buildings of various vintages. While it is easier to vacate privately owned buildings as leases turn over, Public Works is widely regarded as having neglected regular life cycle maintenance of its own buildings. That leads some to believe it will start emptying those properties first.

"The aging buildings they are vacating are not going to be available to the general public, (so it's) not going to increase the vacancy rate," says Alain Desmarais, senior managing director of Cushman & Wakefield Ottawa.

Indirectly, however, private-sector landlords could still find themselves under pressure once those vacated government-owned buildings are retrofitted and reoccupied, which would involve moving more civil servants out of older properties.

That would create some breathing room in the incredibly tight class-B downtown market. This, in turn, could give some tenants, who, for example, are making do in their current buildings by dividing their operations across multiple floors, the option of moving into more suitable space.

Metcalfe Realty, Brookfield Properties and GE Capital Real Estate are among the city's larger class-B landlords.

Public Works says it is currently negotiating a renewal of "a portion" of its leased space at Place de Ville, which is owned by Brookfield. GE, meanwhile, is said to be "trying to get ahead" by renewing its government leases.

From the outside, it is difficult to tell the relative condition of an office building. Many landlords adequately maintain older buildings, upgrading the lighting, air circulation and other building systems to keep them suitable for occupancy.

However, some obsolete elements of a building are difficult - if not impossible - to change, such as ceiling heights, column spacing and elevator shafts.

As such, Public Works's moves could be the catalyst for full-out redevelopments of some downtown city blocks that currently feature older and relatively short six or seven-storey office buildings, says Kelvin Holmes, managing director of Colliers International Ottawa.

"Those (older class-B and class-C) buildings are going to fall further and further behind, faster and faster ... They are going to rapidly lose market share," he says.

He adds rising demand for condominium and hotel development land could ultimately make it financially attractive for landowners to tear down some older buildings and construct new higher-density mixed-use towers.

"The sooner the federal government moves out of those buildings, the better."

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Who's moving across the river?

455 de la Carrière Blvd. (Nov. 1, 2012)

Department of National Defence (from the Constitution Building at 305 Rideau St.)

22 Eddy St. (May 1, 2013)

Public Service Commission (from L'Esplanade Laurier) and Human Resources and Skills Development Canada

30 Victoria St. (June 1, 2013)

Elections Canada, Parks Canada, Office of the Information Commissioner of Canada, Office of the Privacy Commissioner of Canada and PWGSC Heritage Conservation Group.

Source: Public Works