Falling office vacancy rate ‘clearly a trend’ as landlords keep doling out incentives: Brokers

Street-level image of the Constitution Square building
Constitution Square renovated its lobby and introduced other improvements in a bid to lure new tenants. File photo

Ottawa’s falling office vacancy rate is “not an anomaly,” a leading real estate broker says, noting the rate has declined for four consecutive quarters as landlords ratchet up their efforts to fill empty space.

“It is clearly a trend,” Shawn Hamilton, a partner at Proveras Commercial Realty, said in an interview this week after CBRE reported the city’s office vacancy rate dropped to 11.2 per cent in the second quarter, down from 13 per cent at the end of March.

“There is movement. The era of paralysis or kicking things down the road is coming to an end. Business leaders are making the call that they would like hybrid (work arrangements) to be defaulted from the office rather than defaulted from home.”

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Continuing a recent trend, Ottawa’s class-A vacancy rate dropped to 10.8 per cent, down from 12.2 per cent at the end of March, “with occupiers relocating and securing spaces within newer, better-amenitized buildings in the core,” CBRE said in its latest market report.

However, the firm also noted that while demand for space in top-end properties grew in the second quarter, net rents actually declined as landlords continued to dole out incentives such as free rent and fit-up subsidies.

Average net rent in downtown class-A space dropped to $22.97 per square foot, down from $23.29 in the previous quarter, while average rents in the suburbs fell to $15.69 per square foot from $15.77.

Hamilton, who represents tenants in office leasing negotiations, says space in marquee downtown office towers that was “previously unattainable financially” for many occupiers is now within their reach.

Owners of downtown office complexes such as Constitution Square are being “extremely aggressive” in courting new tenants while sprucing up their properties with state-of-the-art lobbies, gyms, audio-visual technology and other amenities, he added, forcing other property managers to follow suit.

In addition, there’s the looming prospect of several large swaths of space in high-profile office towers coming back on the market, meaning landlords are doing everything they can right now to lock in tenants who might otherwise test the waters.

For example, much of the space once occupied by e-commerce giant Shopify in Performance Court at 150 Elgin St. will become available in the next 18 months or so, Hamilton noted, while Bell Canada is looking to sublease nearly 110,000 square feet of space next door at One60 Elgin.

“If I’m Constitution Square, I’m doing everything I can to shore up my vacancy (rate),” he said. “And if I’m the other A-class landlords, I’m shoring up my existing tenants so that when these other vacancies come up, I don’t have tenants who would be tempted by the offerings of the others. We’re a small market, so it doesn’t take a large amount of space to create competition.”

Some of those landlords’ efforts seem to be paying off. 

The Canadian Institute for Health Information, for example, plans to relocate to Constitution Square from its current headquarters on Richmond Road next summer. The organization is leasing 60,000 square feet of space on three floors in the one-million-square-foot office complex that are currently vacant.

“The criteria for our office space included a great, modern building with lots of amenities close by, easy access to public transit, an ability to flex for growth, sustainability, health, safety, and security and would provide excellent value and high quality,” CIHI spokesperson Meagan Foreman said in an email to OBJ on Friday. “Constitution Square met or exceeded our requirements.”

But it’s not just downtown landlords who are seeing increased activity in their buildings.

Suburban zoning advantage

While the downtown vacancy rate dipped slightly in the second quarter, falling six-tenths of a percentage point from the end of March, CBRE said the suburban vacancy rate fell even further – dropping to 10.1 per cent from 11.7 per cent in the first quarter.

Sarah Vandenbelt, a broker at Paradigm Commercial who focuses mainly on suburban office properties, said she’s not surprised at the resurgence of interest in space outside the core.

“Even at the beginning of the pandemic, we had expected that that would be the case, but it never really (happened) that way,” she said. “It’s interesting that we’re now seeing it.” 

Vandenbelt said tenants are attracted to suburban properties due to their abundance of parking and closer proximity to where staff live, making commuting more palatable for employees who grew accustomed to working from home during the pandemic and are now being asked to return to the office at least a few days a week.

The veteran broker also noted that many properties in suburban business parks are zoned for both office and industrial use – a major advantage in a market where light manufacturing and lab space is in perennially short supply. 

“That opens up (space) to all kinds of different users, not just office users,” Vandenbelt said. “While we talk about (office-to-residential) conversions in the downtown core, we’re now talking about office conversions in the suburban markets for more industrial flex users.”

Hamilton said much of the suburban leasing activity is being driven by firms in the Kanata tech hub. 

Many of the tech companies Proveras works with “are clearly wanting to get people back (to the office) in a cohesive way to bolster productivity,” he explained.  

“We haven’t seen a migration from downtown to the suburbs. I would suggest the drop in (suburban) vacancy is because the tech community has probably been hit by the lack of productivity that has resulted from people being remote more than anything.”

Hamilton said it’s the continuation of what he believes is a “settling back to normalcy” for the Ottawa office market after years of turmoil.

“The mindset of business leaders is absolutely starting to look like something that we’re much more familiar with.”

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