No end to office space crunch in sight, veteran Ottawa real estate exec says

Downtown Ottawa
Photo by Marine Kerel

While some local brokers say the rise in teleworking during the COVID-19 era could lead to a surge in tenants looking to rent out excess office space, at least one prominent Ottawa real estate executive says he doesn’t expect a wave of new inventory to flood the market.  

“There’s been a lot in the news about what is the sublease market going to be, what is the future of office going to be, and I would suggest that the story is still playing out,” CBRE Ottawa managing director Shawn Hamilton said after a new report showed the amount of sublease space in the region has been on the rise during the pandemic. 

“My sense is the story won’t be as dramatic as some might think it could be.”

According to CBRE’s second-quarter office market report released this week, the amount of sublease space available in Ottawa jumped 11 per cent between the beginning of April ​– roughly the same time the effects of the coronavirus pandemic really began to hit the city ​– and the end of June.

But the 283,000 square feet of space now available for sublease is still a far cry from the nearly 2.2 million square feet of space that was up for grabs back in 2003, after the tech bubble of the late 1990s had burst. 

Shawn new
CBRE Ottawa's Shawn Hamilton

Today, sublease space represents just 0.7 per cent of Ottawa’s total office inventory, well below the 2003 ratio of 4.2 per cent and barely half the region’s 17-year average of 1.3 per cent. While a few tech firms have already started putting space on the market, Hamilton said he thinks many tenants are still waiting to see how their return-to-work plans play out before they make any decisions.

“With leases having five-, 10-year periods, it’ll take a while for things to trickle on to the market,” he said. “I think in times of uncertainty, historically we've shown that the sublease market does generate some momentum. We expect that to a certain degree.”

Will Ottawa weather the storm?

CBRE’s report comes after a couple of leading local real estate brokers recently told OBJ they’re seeing a greater-than-usual number of clients looking to put space on the market as companies move toward more of a hybrid model that would see at least some employees work permanently from home.

Elsewhere, brokers in downtown Toronto also reported a “spike” in vacant offices as businesses struggle to sublet their spaces.

But Hamilton isn’t convinced a sea change in the market is approaching. He says the city has weathered the current storm comparatively well, and he expects many tenants will end up holding on to their space – if not expanding it – as the economy starts to recover over the longer term.  

“We’re still seeing companies grow, we’re still seeing companies looking for space, albeit at a reduced rate just given the period of uncertainty,” he said. 

“I’m not seeing any real signs from the tech community as a whole of slowing down or pulling back. There will be more sublets coming up, but I think the net growth will outweigh the subleases that are happening, and I think there will still be pressure to build (new inventory).”

About 330,000 square feet of new office space is currently under construction in the capital – but most of it is part of the $1.5-billion Zibi redevelopment project on the former Domtar lands just north of the Canadian War Museum and is already pre-leased, “providing little in the way of space for new growth,” the CBRE report says.

KRP Properties and Regional Group are both proposing significant new office builds on Solandt Road in the heart of the Kanata North tech park, and Hamilton said he expects those projects to go ahead.

“Design build opportunities such as 2700 and 2707 Solandt Road could offer viable options for tenants who seek modern, large blocks of space in the west end that can be customized to suit new social distancing protocols,” CBRE explained in its report.

The city’s overall office vacancy rate jumped 60 points to 7.2 per cent in the second quarter – although that’s still well below the five-year average of 9.4 per cent, and CBRE said it remains bullish on the market’s long-term prospects thanks to the strength of the tech sector and the stability of the federal government.

Downtown market

In the central business district, the rate increased from six per cent to 6.8 per cent – mostly due to the Department of National Defence vacating 190,000 square feet of space at 110 O’Connor St. earlier this year as it shifted its operations to the former Nortel campus on Moodie Drive – while in the tech hub of Kanata the vacancy rate ticked up one-tenth of a percentage point to 6.3 per cent.

Cominar’s property at 110 O’Connor is one of the few large blocks of space available anywhere in the city right now, and Hamilton said he’s eager to see what becomes of the 14-storey class-B office tower near the corner of Slater Street.

“I’m sure given the state of the multi-residential market in Ottawa, they’re giving thought to … a multi-residential play,” he said. “There’s a whole host of opportunities that surround that building. We’re waiting to see how it plays out.” 

Meanwhile, Ottawa’s industrial availability rate dipped a tenth of a percentage point to 3.3 per cent in the second quarter. 

With one major industrial development – Broccolini’s 2.7-million-square-foot warehouse project for Amazon at the Citigate Business Park in Barrhaven – already under way and another one million square feet of space proposed at a new business park on Russell Road, CBRE says the capital region could soon become a hub of new industrial activity.

“As e-commerce gains traction and an increase in storage and distribution facilities are needed, the industrial asset class is expected to see growth in a tight market, requiring the construction of new facilities,” the report said. “Evidence of this demand is seen with numerous large-scale development applications as well as new development land being brought on board.”