Ottawa's office landlords taking flexible approach with tenants amid pandemic

ottawa

Longtime commercial real estate broker Mike Church has had a front-row seat to witness the impact the COVID-19 pandemic is having on landlords and tenants across the city.

The managing director of Avison Young’s Ottawa office says in the days leading up to April 1, property managers all over town were being inundated with calls from anxious tenants for some form of rent relief.

“The requests are coming from everywhere, and from groups that you wouldn’t think would be impacted at all,” he says. “Everybody’s jumping on the bandwagon.”

Across Ottawa, commercial real estate brokers and landlords tell a similar story. With the spread of the novel coronavirus forcing governments to impose widespread business shutdowns, tenants, building managers and property owners alike are all nervously watching and wondering how severe the economic repercussions of the crisis could become.

“The industry at large is still trying to figure things out,” says Shawn Hamilton, senior vice-president and managing director of CBRE’s Ottawa office. “Right now, everyone’s still drinking from a hot fire hose and learning the scale of what’s happening.”

Just a few short weeks ago, Ottawa’s commercial real estate scene was riding high, with single-digit office vacancy rates in the downtown core and the west end and a spate of new office tower developments on the drawing board in the tech hub of Kanata North.

But with COVID-19 unleashing economic turmoil on a scale not seen in this country in generations, many of those plans are likely to be put on hold – at least for the time being.

Landlords and tenants, meanwhile, are trying to map out a way forward that inflicts the least economic pain. 

Many businesses that lease commercial space – particularly in the retail sector – are hurting, and landlords contacted by OBJ say they’re willing to be flexible on payment terms as tenants try to weather the storm.

“I think we’ve got to understand that the impact of this is significant,” says Hugh Gorman, CEO of Ottawa-based Colonnade BridgePort, which owns or manages nearly seven million square feet of real estate in the National Capital Region.

Gorman says Colonnade BridgePort has talked with all its tenants and is assessing their financial situations on a case-by-case basis.

“We’re looking at creative ways, depending on each situation, to give tenants a break in rent,” he explains, adding about 15 per cent of his clients asked for some sort of relief before April 1.

For example, he says, some businesses in the most vulnerable sectors, such as retail, could be allowed to defer their rent entirely until the crisis eases and gradually repay the amount owing over the next 12 months or more. Other tenants could get partial deferrals.

The Regional Group, which owns Kanata’s Hazeldean Mall and manages more than 2.5 million square feet of commercial property in Ottawa, is taking a similar approach with its tenants.

“Really, the last two weeks have been largely about communicating with everybody,” says chief operating officer Dave Wallace. “Every landlord in the city is getting deferral requests. You just have to do it on a case-by-case basis and determine what people’s needs really are and see what you can do with the building owner. By and large, they’ve been very co-operative with us.”

Bruce Wolfgram, a principal at Proveras Commercial Realty in downtown Ottawa, represents tenants in leasing negotiations. He estimates that about half of his clients’ landlords have offered some sort of short-term assistance to tenants, generally in the form of rent deferrals.

“This is a time of apprehension for all tenants,” he says. “A lot of companies are currently trying to see what they can do to make ends meet.”

The real estate industry veteran acknowledges that many landlords and property owners are also going through tough times right now, and any negotiations over rent relief need to be a two-way street.

“They have their own expenses, bills, mortgages, operating costs to pay,” Wolfgram says. “So this is not pleasant for them either. But on the other hand, it would be helpful if all parties would be able to come to some reasonable solution that works for everyone. 

“At the end of the day, it’s not going to do anyone too much good if landlords can come through this relatively intact, but their buildings are at 25 per cent occupancy because the majority of their tenants couldn’t survive.”

Martin Aass, managing principal of real estate brokerage Cresa Ottawa, agrees.

“It really isn’t a discussion about what (landlords) can give you as a tenant,” says Aass, who also negotiates solely on behalf of commercial renters. “It’s going to be a discussion about giving and getting … what can we do to help each other through this situation.”

Hamilton, whose firm brokers deals for both landlords and tenants, says he’s hopeful that all players in the industry will work together to help each other through a time of severe economic upheaval.

“I think if people take a long-term view, we should avoid a significant spike in vacancy rates,” he says. “I think it would be a failure on us as a commercial real estate community to let that happen. I think the commercial real estate community should just hold their breath, take a collective pause and give people those number of months that are needed to get through this. Otherwise, you’re compounding the problem.” 

Future developments could be stalled

As for future office projects, industry experts say it largely depends on what phase they’re in. Developments that are already under construction will likely continue as long as it’s safe to keep working on them, while others that are still winding their way through the municipal planning process could be delayed until the COVID-19 crisis abates and the economy returns to more solid footing.

“We might put (a project) on pause for a brief period, but we’re not going to abandon it,” says Wallace, whose firm has a number of developments in the planning stages, including a seven-storey, 143,000-square-foot office building in Kanata North. “We just want to make sure that everything goes forward safely and that people are cared for.”

At the same time, however, many tenants who had been thinking about leasing more space or renovating existing premises are probably reconsidering, Church says. He says he already knows of at least one downtown business that was talking with a landlord about a major expansion but has since put those plans on hold.

“People are stalling decisions that require more cash,” he says.

“Here’s the one tenant in the world who is (guaranteed) to pay the rent on time and pay their people on time. That is such a huge benefit to the city right now.”

Still, many real estate observers say they’re optimistic that Ottawa’s relative economic stability will help the sector bounce back once businesses reopen their doors and revenues start flowing again.

“This is where being the ‘sleepy government town’ really has a benefit,” says Hamilton.

“Here’s the one tenant in the world who is (guaranteed) to pay the rent on time and pay their people on time. That is such a huge benefit to the city right now.”

Church agrees the commercial real estate industry’s long-term prospects remain bright.

“We will come out of it at some point,” he says. “It’s just there’s going to be some pain between now and whenever that actually happens.”

Advice to tenants

Tenants looking to negotiate rent deferrals or other forms of relief need to be proactive in dealing with the situation, Ottawa real estate brokers advise.

Martin Aass, managing principal at Cresa Ottawa, recommends talking with your broker first before calling your landlord to work out a deal.

“As brokers, I think we have a deeper understanding of the different things the landlord might value as something to be offered (in a negotiation),” he says.

When you are talking to your landlord, it’s important to look at things from their point of view, he adds. 

“It’s also worth bearing in mind that the landlords are being hurt just as badly as everyone else by this,” says Aass, who represents a variety of tenants from non-profits to tech firms. 

“It really isn’t a discussion about what they can give you as a tenant – it’s going to be a discussion about giving and getting … what can we do to help each other through this situation. You need to have an open and collaborative discussion. It’s not a fight.”

Tenants should also review their lease with a lawyer to confirm exactly what provisions it contains regarding circumstances such as the COVID-19 pandemic, says Bruce Wolfgram, a principal at Proveras Commercial Realty in downtown Ottawa.

Most leases compel tenants to keep paying rent even in a widespread health crisis, he notes.

“There is no avenue in the majority of leases for this sort of event to allow a tenant to not pay the rent,” he explains. “Strictly and legally speaking, tenants must pay their rent.”

Wolfgram, who represents only tenants, has told his clients to pay their April rent if at all possible. He is recommending tenants warn their landlords in writing as soon as they can if they’re concerned about their ability to cover payments in the months ahead.

“You do not want to be in default,” he says, noting commercial tenants in Ontario can still potentially be evicted even in the current crisis. 

Even if they’re not evicted, tenants could find themselves in hot water when it’s time to renew their lease should they unilaterally decide not to pay rent now, Wolfgram adds.

“At the end of the day, landlords are human beings too. There needs to be discussion.”