Several prominent local real estate experts say they expect vacancies to keep rising as businesses rethink their space requirements.
Ottawa’s downtown office vacancy rate hit an all-time high in the first quarter of 2023 as tenants continued to downsize amid an ongoing shift to hybrid work – and several prominent real estate experts say they expect vacancies to keep rising as businesses rethink their space requirements.
In its latest office market report released Tuesday, real estate firm CBRE said 13.2 per cent of office space in the city’s central core was vacant last quarter, more than double the rate of 6.5 per cent at the end of 2019, before the pandemic struck. It’s Ottawa’s highest downtown vacancy rate since CBRE began tracking the statistic in 1996.
Ottawa’s overall office vacancy rate rose to 12.3 per cent last quarter, CBRE reported. It’s the third straight quarter that the city’s office market has slowed as the sector undergoes what the real estate firm calls “a once-in-a-generation evolution.”
As remote work or reduced time in the office becomes the norm, veteran brokers say clients in virtually every sector are looking to shrink their office footprints, either by subleasing space or renting less of it when their leases come up for renewal.
Louis Karam, managing director of CBRE’s Ottawa office, predicts the city’s office vacancy rate will continue to rise for at least the next couple of quarters as more companies push to reduce the amount of money they spend on real estate.
“We’re trying to see what’s happening with the feds returning to office and we’re seeing more and more clients re-evaluate their needs and really shrink their square footage,” says Karam.
Warren Wilkinson, managing director of Colliers’ Ottawa office, says tenants whose deals are up for renewal are signing on for longer terms than earlier in the pandemic, when many businesses were reluctant to commit to deals of more than three years.
Now, he says, the five-year leases that were commonplace pre-COVID “are becoming more of the norm.”
But as they’re renewing, tenants are also giving back a lot of real estate.
“We’re seeing a reduction in space – in some cases, as high as 50 per cent – but the commitment to the transactions is there,” Wilkinson says.
Alan Doak, a principal at Ottawa-based Proveras Commercial Realty, says the commercial real estate industry is getting hammered by a triple whammy: the rise of hybrid work; higher interest rates that make it more costly for businesses to carry debt, forcing them to cut back in other areas like real estate; and the looming threat of a full-blown recession.
None of that, he notes, translates into good news for the future of the office, at least in the short term.
Doak’s forecast is even less optimistic than Karam’s. The veteran broker, who solely represents tenants, believes it could be up to three years before the office market starts to really stabilize.
“We do think that there is going to be prolonged, elevated vacancy in downtown Ottawa for the foreseeable future,” he says. “It is almost uniformly a contraction (of office space) when we’re having conversations with tenants, no matter what industry segment they’re a part of.”
Doak has done some back-of-the-napkin math to try to get a sense of how much Ottawa’s office footprint could shrink over the next few years.
He estimates that about 15 per cent of all the city’s office leases come up for renewal in any given year. If those tenants choose to cut their space requirements by an average of 25 per cent, that equates to roughly a 1.5 to three per cent reduction in the overall amount of office real estate being occupied each year for the next few years.
Looking further down the road, Doak says, “It’s hard to predict what will happen. I expect we’re going to see things go back to more normal demand for office space.”
Observers are also keeping a close eye on what role the city’s largest occupier of office space, the federal government, will play in the sector’s future.
The government’s decision to order most workers to return to the office two or three days a week as of March “will likely guide decision-making in the private sector in the subsequent months,” CBRE said in its report.
But Wilkinson says anyone who believes the feds’ return-to-office mandate will trigger a stampede of private-sector workers back to their downtown digs is likely to be sorely mistaken.
“Expecting the federal government to fix this problem for us would be nice, but I don’t think it’s practical,” he says. “We as a community perhaps need to start looking beyond that now.”
Doak agrees, noting the government is saddled with rising debt and is in no position to rescue the office sector the way it has after past economic downturns.
“We’re going to have to cut back and those cutbacks are going to be felt most strongly in Ottawa, as they always are when the government cuts back,” he says.
While vacancies keep rising, average net rental rates for the most highly coveted class-A properties have held steady at just under $23 a square foot, CBRE says.
Instead of cutting rental rates, landlords are offering other incentives, brokers say. They include a few months of free rent, more money for office makeovers and “non-financial elements” like early termination clauses and giving tenants the right of first refusal on neighbouring space should they choose to expand.
Tenants are also asking building owners to equip offices with furnishings and elements such as movable walls that can be quickly reconfigured to meet their needs, Doak adds.
“Nobody knows exactly how they’re going to be working in five years’ time,” he says. “People want to have the flexibility to design spaces that they’re going to be able to modify relatively easily over time.”
Meanwhile, a closer look at the numbers shows the pain of rising vacancies is not being felt evenly across the office sector.
While Ottawa’s downtown vacancy rate for class-A properties was still a relatively healthy 7.6 per cent last quarter, according to Colliers, it was 18.2 per cent for less desirable class-B buildings and a whopping 32.8 per cent for class-C space, due largely to the Correctional Service of Canada vacating nearly 110,000 square feet at 360 Laurier Ave. W.
“What we’re seeing is this gap getting wider and wider between the haves and the have-nots,” Karam explains.
Although some experts have suggested aging office towers could be repurposed as residential buildings, Wilkinson says landlords need to start thinking about other potential uses for class B- and C space, such as renting it to professionals like doctors and dentists.
If that doesn’t work, more drastic measures might need to be taken, he adds.
“We just need to be creative with how we’re going to get through it,” Wilkinson says. “If demolition and rebuilding is an option, then I don’t think anyone would look at a developer and say that’s the wrong move if they’re sitting on massive amounts of vacancy in an empty building for a significant period of time.”
Ottawa’s situation mirrors a national trend that saw Canada's national office vacancy rate hit an all-time high in the first quarter of the year, according to CBRE.
The firm says the country's overall office vacancy rate amounted to 17.7 per cent, while downtown office vacancies sat at 18.4 per cent and the suburban rate landed at 16.8 per cent.
Toronto’s downtown office vacancy rate reached 15.3 per cent, the highest level Canada’s largest office market has seen since 1995.
Vancouver's downtown office vacancy rate rose to 10.4 per cent, the highest it’s been since 2004. Montreal also recorded its all-time highest downtown office vacancy rates at 16.5 per cent.
– With files from the Canadian Press
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