Feds to vacate Metcalfe’s MacDonald Building

Landlord says it will be ‘competitive and creative’ in marketing downtown portfolio

The federal government says it will vacate a 49-year-old downtown office building when its lease with Metcalfe Realty expires next year, the latest sign of the pressure facing owners of older properties in the core.

Approximately 530 employees of Health Canada and the Status of Women Canada office work inside the MacDonald Building at 123 Slater St., between Metcalfe and O’Connor streets. The federal government said it leases roughly 110,300 square feet in the 11-storey building.

A Public Works spokesperson gave no reason for the decision not to renew the lease, which expires April 30, 2013, except to say that Health Canada’s space requirements will be accommodated elsewhere in the federal government’s office portfolio.

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In recent months, several local real estate observers have predicted owners of older class-B and class-C downtown buildings will face challenges keeping their properties full.

The federal government, which is reducing the size of the civil service and previously indicated it wants to lessen its presence in Ottawa’s central business district, is scheduled to take possession of more than two million square feet of office space in five newly constructed buildings  by the end of 2014, and move the Department of National Defence into the 2.35-million-square-foot former Nortel campus later this decade.

Which buildings the federal government will vacate largely remains an unanswered question, but industry observers say it is likely to be older properties leased and owned by Public Works.

Already, landlords are said to be making highly aggressive offers to secure government tenancies. Public Works is believed to have paid below-average rents earlier this year for class-A space when it struck a deal to lease 60,000 square feet for the Department of Justice at Place Bell and renewed more than 378,000 square feet inside Morguard’s Centennial Towers at 200 Kent St.

Discounted class-A rental rates puts pressure on class-B landlords to lower their rates.

Metcalfe Realty recently acknowledged that class-B downtown vacancy rates are creeping upwards and said they would be “aggressive” in pursuing new business.

“We will be very competitive and creative with our leasing packages and incentives moving forward in 2012,” wrote Metcalfe’s director of leasing, Michael Shore, in a February e-mail to clients. “Aggressive rental rates, full turnkey proposals and long lease terms will all be on the table.”

Mr. Shore declined to comment when contacted by OBJ.

Metcalfe Realty owns in excess of two million square feet in more than 20 buildings across Ottawa, including six clustered together in the downtown core.

Beyond the MacDonald Building, Metcalfe Realty has few downtown government tenancies, according to Darren Fleming, managing principal at brokerage firm Cresa Ottawa. Its downtown buildings – which were all constructed between 1960 and 1970 – are filled mostly with smaller tenants paying rents that are healthy, but on the low end of the spectrum, he said.

“If you are a national association that needs to be within walking distance of the Hill … (Metcalfe Realty is) a very affordable price point with no frills,” said Mr. Fleming.

“They’ve been able to command some pretty high rents in some not-very-nice buildings for a while because they were still the cheapest. But as everybody else’s rents are coming down, they will have to come down too.”

Metcalfe is part of the Fuller Group of Companies, which also owns Fuller Construction, Just Right Self Storage and Loch March Golf & Country Club.

Metcalfe Realty owns the surface parking lot and all the buildings, save for the Sheraton Hotel, in the block bounded by Albert, Slater, Metcalfe and O’Connor streets, creating the possibility of demolishing the MacDonald Building and constructing a more modern office tower.

But with soft demand for downtown office space, Mr. Fleming said he suspects Metcalfe Realty will make some renovations to MacDonald Building and market the space.

“They will probably brighten up the inside, but not put a ton of cash into it because at some point, that building will come down.”

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