'Flight to quality' office space fuels dip in vacancy rate for first time since 2019: CBRE

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Ottawa’s inventory of vacant office space shrank last quarter for the first time in 21 months – a signal that the local market is starting to claw its way out of a pandemic-fuelled slump, the head of a major real estate brokerage says.

The capital’s overall office vacancy rate dipped to 9.7 per cent this month, CBRE said in its latest market report released Thursday. That’s down from 9.8 per cent in the second quarter, marking the first net absorption of office space in the capital since the fourth quarter of 2019.

The largest drop in office vacancies came in properties that are typically among the most expensive to rent – the downtown class-A market. The class-A vacancy rate in the core fell 50 basis points to 7.2 per cent, offsetting a jump of 60 basis points in higher-end offices in the suburbs.

With the restrictions aimed at controlling the spread of COVID-19 keeping many workers hunkered down at home, office towers across the region have hollowed out during the pandemic. 

But CBRE Ottawa managing director Louis Karam said he’s seeing growing signs that employers are eager to get back to the workplace as vaccinations roll out and large swaths of the economy are resuming full activity.

“It’s exciting to see,” he told OBJ. “As companies are preparing to return to the office, there is this flight for quality (real estate).”

Canopy Growth vacates space

Karam attributed the jump in the suburban class-A vacancy rate to cannabis producer Canopy Growth’s decision to put 45,000 square feet of space at its Kanata offices on Leggett Drive back on the market. That helped push the total amount of space available for sublet in Ottawa to 590,000 square feet, up from 536,000 square feet in the second quarter.

Even with rising demand, average net rents for class-A space in the core fell 15 cents last quarter to $23.28. Karam suggested tenants still have plenty of options when shopping for new digs, giving them leverage in negotiations with landlords. 

CBRE also noted that two major office projects are nearing completion but won’t add much to the city’s stock of empty space – Kinaxis’s new 153,000-square-foot headquarters in Kanata that’s slated to be finished in the fourth quarter and an eight-storey, 158,000-square-foot class-A building at the Zibi development west of downtown, where the federal government is set to be the anchor tenant.

On the industrial side, Karam said Ottawa continues to be an “attractive market” for e-commerce and logistics tenants seeking to capitalize on the city’s close proximity to Toronto and Montreal.

CBRE said the availability rate of industrial properties in Ottawa declined to 2.6 per cent at the end of September, down from three per cent in the second quarter. 

Little new inventory

Net rental rates, meanwhile, dropped to $11.94 per square foot, down from a record $12.06 per square foot at the end of June. CBRE said the slight decline reflected “decreasing availability within best-in-class properties” as tenants struggle to find quality vacant space in a market with little in the way of new inventory. 

Noting that more e-commerce and logistics tenants are looking to enter the market, the company said it’s also seeing more grocery firms eyeing the capital as a distribution hub as they aim to expand home delivery services that became popular during the pandemic. 

“In particular, tenants are looking to the development pipeline to provide high-quality product needed to establish a foothold and become successful in the market,” the report said.

A one-million-square-foot business park near the corner of Hunt Club and Walkley roads is now under construction, and Karam said the new space is “quickly filling up.” Meanwhile, Amazon’s 2.8-million-square-foot fulfilment centre in Barrhaven is expected to be completed before the end of the year.

“Once delivered, these spaces will strengthen Ottawa’s foothold as an emerging distribution hub in central Canada,” CBRE said.