Tenant downsizing will fuel rise in Ottawa's office vacancy rate this year: CBRE

Ottawa office tower

The amount of empty office space in Ottawa will keep growing in 2021 as tenants continue to downsize and eye a permanent shift to hybrid work models in the wake of the pandemic, a major Canadian real estate brokerage predicts.

In its annual market outlook released this week, CBRE is forecasting the capital’s overall office vacancy rate will jump three percentage points to 10.7 per cent this year. The downtown rate is expected to rise from 9.5 per cent to 12.1 per cent, while the suburban rate is projected to edge up from eight per cent to 9.6 per cent.

“The pandemic has had a direct impact on office occupancy and how tenants utilize their space,” the report said, adding 2021 “will see a slow return to regular office life, particularly from the government and private sectors, as they wait for vaccination.”

Nico Zentil, senior vice-president of capital markets at CBRE’s Ottawa office, says a fog of uncertainty still cloaks the industry as it begins to contemplate a post-pandemic world. But he’s confident the spike in vacancy rates will be a short-term blip as vaccines begin to roll out and workers feel more comfortable about re-occupying their cubicles. 

“It’s tough to predict, but I think I feel pretty good about predicting a lack of catastrophe in the office space sector,” he told OBJ. 

Still, CBRE said a recent national survey it conducted shows about two-thirds of employees want “a balance of remote and office work” as the pandemic abates. The firm says recent analysis suggests the growing work-from-home trend could cut the need for office space by 10 to 20 per cent, “but it’s still too soon to know.”

Zentil says that while some tenants are looking to shed space, others will need to add to their real estate footprints to accommodate physical distancing. 

'Net-neutral situation'

“I think that we’ll probably use (office space) a little bit differently … but you may have a net-neutral situation in terms of impact,” he said.

In its report, CBRE noted that many companies are “re-evaluating their future office needs” and putting real estate up for sublet as they consider hybrid arrangements where workers split their time between the office and home. 

“More space is likely to hit the market in the year ahead, creating many available office opportunities for prospective occupiers to choose from,” the real estate firm said. “However, not all space is created equal, as some of these sublease listings will have less productive, antiquated layouts and may face difficulties in finding a new tenant.”

CBRE said it doesn’t expect rising inventory to translate into significantly cheaper rents. Its downtown rent forecast calls for average prices to drop about 30 cents per square foot, from $23.57 in 2020 to $23.25 this year.

“Canadian occupiers hoping for drastic reductions in rental rates are unlikely to see their wishes fulfilled in 2021,” the company said. “Rental rate decreases lag changes in the economy and rebound more quickly when there is a turnaround.”

At the same time, Zentil said landlords might start offering other incentives such as shorter lease terms as a way of attracting new tenants.

“Any time you can create flexibility that’s going to be mutually beneficial for both (tenants and landlords), assuming that makes sense from a business perspective, I see that being in play.”

In the industrial sector, CBRE said the explosion in e-commerce during the pandemic is fuelling renewed demand for space as online retailers develop more complex logistics networks focused around massive distribution facilities like Amazon’s Ottawa fufilment centre on Boundary Road.

Demand for such “strategically located urban warehouses” is expected to surge along with the rise in online spending, and CBRE is predicting a net gain of 40 million square feet of warehouse space across Canada over the next five years.

Tight industrial market

Many experts consider the capital to be a burgeoning e-commerce distribution hub because of its close proximity to Canada’s two largest cities. Amazon is set to open another 2.8-million-square-foot warehouse in Barrhaven later this year, but with no other new industrial projects confirmed, CBRE says “the need for new speculative developments has only intensified.”

Zentil said he expects other companies to follow Amazon’s lead and build warehouses in the National Capital Region, provided they can find land zoned for development – a key sticking point for the city’s industrial sector in the past.   

“I see really bright tea leaves for Ottawa in terms of where our industrial market is heading,” he added.

The firm is projecting Ottawa’s industrial availability rate will drop to 3.5 per cent in 2021, down from 4.1 per cent last year. The tight market means that despite an aging inventory ​– the city’s average industrial building is 40 ​years old – asking rents have hit record highs over the past 12 months and are expected to rise throughout 2021 to an average of $11.30 per square foot.

CBRE also expects the capital’s retail economy to rebound after a dismal 2020 that saw many brick-and-mortar businesses shuttered for much of the year due to COVID-19 restrictions. 

The firm is projecting total retail sales per person to reach nearly $16,500 in 2021, up $1,000 from last year. Total sales are expected to grow 7.5 per cent after dropping 3.2 per cent in 2020.

Following a spate of closures during the pandemic, CBRE says it expects “new and emerging retailers” to snap up vacant storefronts in 2021.

“Digitally native brands, medical, health and wellness, pet services and franchisee-driven operations will look for real estate opportunities,” the report said, adding grocers, convenience stores and quick-service restaurants are also expected to be in the market for additional space in the coming months.