Ottawa’s downtown office vacancy rate to hit 15% in 2024, CBRE predicts

February 28, 2024
4:33 PM
ET

Organizations: CBRE, Real Strategy Advisors

People: Darren Fleming, Louis Karam

In its 2024 Canadian market outlook released this week, CBRE predicts Ottawa’s overall office vacancy rate will hit 14.1 per cent before the end of the year, up from 13.3 per cent in December 2023.

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Ottawa’s office vacancy rate is expected to rise above 14 per cent in 2024 before stabilizing as tenants settle into a new normal of downsized footprints, real estate firm CBRE says. In its 2024 Canadian market outlook released this week, CBRE predicts Ottawa’s overall office vacancy rate will hit 14.1 per cent before the end of the year, up from 13.3 per cent in December 2023. CBRE says tenants will continue to shed space across all submarkets, with the downtown vacancy rate projected to increase to 15 per cent from 14.2 per cent at the end of 2023 and the suburban rate expected to rise to 13.3 per cent from 12.5 per cent. Ottawa’s rising vacancy rate mirrors a trend across North America as remote work has become an entrenched way of life since the pandemic. Many employers, including the federal government, are now embracing a hybrid work approach that sees employees come to the office two or three days a week. The result has been reduced demand for space, with more tenants renewing leases with smaller footprints, said Louis Karam, managing director of CBRE’s Ottawa office. And when tenants do sign new contracts, it’s often in newer buildings with fancier amenities – a trend that CBRE predicts will become “even more pronounced” in 2024. “The flight to quality is going to remain – the buildings that are well-amenitized, versus the ones that aren’t, the buildings where landlords are investing in the property, versus the ones that aren’t,” Karam explained. “Right now, well-amentized class-A buildings are seeing a lot of activity, and that will continue.” Despite the growing vacancy chasm between higher- and lower-quality buildings, the veteran broker sees signs of hope for the office market. A growing number of tenants who were reluctant to make long-term office commitments earlier in the pandemic are now locking in to five- or 10-year leases as was the pre-COVID norm, Karam said. “We’re seeing some activity where tenants are willing to commit to longer-term leases, and so I think that’s going to continue,” he said. “I’m starting to see the light at the end of the tunnel, where towards the end of this year (vacancy rates) should have kind of plateaued and started back into a decreased office vacancy.” In addition, more aging office buildings will likely be taken off the market and converted into residential complexes, Karam added, which should further reduce the downtown office vacancy rate. “It’s not the end all and be all, but it’s a move in the right direction,” he said of conversion projects such as the one local developer CLV Group is planning for a vacant office tower at 360 Laurier Ave. “It is one option, and it’s nice to see developers exploring it.”

'The sky isn't rosy'

Not all commercial real estate brokers are as bullish on the long-term future of the National Capital Region’s office market, however. Darren Fleming, CEO of Real Strategy Advisors, estimates that overall demand for office space in Ottawa has shrunk by at least 25 per cent over the past four years as tenants fled the office during the COVID-19 crisis – and he sees no one stepping up to fill all those empty cubicles. “I think I’m one of the few who will dare to say that maybe the sky isn’t rosy looking forward,” said Fleming, whose firm exclusively represents tenants. “People aren’t coming back (to the office). There’s a whole sector of the market (in which) the tenants are gone.” Fleming says the overall vacancy rate is deceiving because there are haves and have-nots, even among more desirable class-A properties. The vacancy rate in towers that are actively marketing empty office space is often well above 20 per cent, he said, as tenants pull up stakes to occupy smaller footprints in more upscale buildings. “The commercial real estate industry loves to say … that, ‘Hey, things are bad right now, but they’re not as bad as you think and in a year or two it should be back to normal,’” Fleming said. “There isn’t an upswing in the economy that’s going to bring the workers back to the buildings. Some of these buildings are fundamentally in trouble because tenant demand has declined.” While the downtown core has been particularly hard-hit due in large part to the federal government’s shift to hybrid work, CBRE says landlords in Kanata are also feeling the pain as remote work has taken hold and the tech sector has suffered through a wave of downsizing. “Overcorrection of previous growth, layoffs and space being put on the sublease market will see landlords feel the impact,” the report said. Karam said that while he believes a turnaround is in sight for the Kanata office market, landlords in the far west end aren’t out of the woods yet. “This three-day model is going to continue, so while I think that in 2024 things are going to get better, we’re still seeing the impacts of the pandemic, of the slowdown of the tech sector, and I think we’re going to continue to see a few bumps in the next few months,” he said.