Ottawa’s industrial and office vacancy rates to fall further in 2019: report

Ottawa

Thanks to a robust local economy fuelled by growth in the tech and government sectors, vacancy rates in Ottawa’s office and industrial markets are expected to keep falling while rental rates climb toward record highs in 2019, a new report says.

In its annual Canadian outlook released this week, commercial real estate firm Avison Young predicts overall office vacancy rates in the capital region will dip to 7.7 per cent by the fall, well below the mark of 10.4 per cent just two years ago.

The report projects vacancy rates in the downtown core will drop below six per cent by the end of 2019. Avison Young said a lack of new inventory means rising demand for the ever-dwindling supply of office space ​– particularly in top-tier properties located in the red-hot downtown and Kanata markets ​– will continue to push rents skyward for the next 12 months.

“With limited new construction underway, the class-A market has continued to tighten with net effective rental rates beginning to approach historic highs in that asset class,” the report said, adding that the downtown class-B market has also rebounded from an exodus of federal government tenants a few years ago.

Two new office projects slated to launch this year in Kanata ​– Cominar’s new building at 800 Palladium Dr. and another development from Merkburn ​– will add another 140,000 square feet of inventory to the west end by 2020, Avison Young said, noting about half of that new space is already preleased.

“Strong growth in the technology and engineering sectors will continue to sustain the Kanata market,” the report said.

Avison Young is also predicting the city’s industrial sector will tighten up in 2019, with projected vacancy rates falling half a percentage point to two per cent. More than one million square feet of space is slated to be added to the city’s inventory, the report said, but 96 per cent of that will be swallowed up by e-commerce giant Amazon when it takes over a massive new warehouse off Boundary Road later this year.

“As a sector characterized by older stock with relatively low-ceilinged assets, the Ottawa industrial market could benefit from some speculative development in 2019,” Avison Young said.

When it comes to retail, the firm says local shopping malls are being forced to rethink their business models in the face of competition from online retailers and the demise of former anchor tenants such as Sears.

But the report suggests retail landlords in the National Capital Region, where consumers have one of the country’s highest average household incomes and the unemployment rate is below five per cent, are better positioned to weather the storm than their counterparts in many other Canadian cities.

“Ottawa’s retail sector benefits from one of the most stable employment markets in the country. With employment increasing, retail sales in the nation’s capital are expected to continue to perform well,” it said, adding the anticipated arrival of storefront cannabis retailing “will undoubtedly create some market turmoil in 2019.”

The report also says light rail’s expected arrival later this year will fuel a new wave of mixed-use development through 2019 and beyond, adding it expects property near the LRT’s Confederation and Trillium lines to command record prices in the coming months.