Landlords seeing a ‘flight to experience’ as tenants flock to high-end office spaces, CBRE says

David Sali

January 15, 2025

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Tenants trading up to smaller, more modern and well-equipped spaces are fuelling a widening gulf between the haves and have-nots in the National Capital Region’s office market, the new managing director of CBRE’s Ottawa office says. Maxime Foucaud said Ottawa’s situation mirrors a growing national trend that’s seeing companies “right-size” into amenity-rich real estate in an effort to entice employees back to the office. “Users are fairly similar market to market, and it’s not that different in Ottawa,” said Foucaud, who grew up in the nation’s capital and returned to his hometown last fall to head up CBRE’s local operations after spending nearly 15 years as a commercial broker in Montreal. “We’ve noticed in the last few years coming out of the pandemic that the assets that were well-positioned, welcoming assets – class-A, fairly well-amenitized – were attracting more tenants as tenants were shifting their mindset of what they want in this post-pandemic era.” Foucaud’s comments came a day after CBRE released its 2025 real estate market outlook. The report said office tenants are becoming “more refined” in choosing new space as leases that were signed before the pandemic are now expiring – a trend it dubs “a flight to experience.” “A shift to hospitality-inspired amenities and experiences have led occupiers to seek amenitized buildings that either offer or augment what they can provide within their own footprint,” CBRE said, adding both “the building and surrounding neighborhood play a crucial role in creating an exceptional employee experience that remote work cannot replicate.” Foucaud said more and more tenants are looking to reduce their current office footprints and relocate to more compact space with more efficient layouts, “beautiful furniture” and amenities such as gyms, daycare centres and coffee shops. That’s created a “bifurcation” between older, less desirable buildings and newly renovated “trophy assets” such as Constitution Square, the Sun Life Centre and the World Exchange Plaza that have upped their games to attract new occupants, he explained. “Sometimes it’s the ‘build it and they will come’ sort of thought,” he said. Foucaud suggested that owners of lower-tier properties need to spruce up their assets and find ways to stand apart from the pack. “Is the gap going to continue widening? It’s possible,” he said. “You need to continuously invest in your assets and make sure you’re keeping in mind what the user is going to want and need at the end of the day. “If you wait for that to occur, you may be waiting too long. Different assets are competing for the time of some of these tenants when they’re viewing these properties. So if you’re positioning yourself well to capture (a tenant’s) mindset, what they’re looking for, you’ll be successful in the future.”

'Shadow vacancies' emerging

Looking ahead, CBRE predicts that office vacancy rates across Canada will peak early this year before gradually declining. “General sentiment is trending positively, providing green shoots of optimism in the year ahead,” the company said. While Ottawa’s overall office vacancy rate rose in the fourth quarter of 2024 as tenants continued to downsize, Foucaud noted that it’s still one of the lowest in Canada at under 12 per cent. CBRE predicts vacancy rates in Ottawa could rise further in the short term as more “shadow vacancies” – that is, space that appears occupied, but is not being used by the tenant – are set to emerge. But Foucaud said he thinks things will improve for landlords as the year goes along. He predicts 2025 will be a “year of clarity” in the nation’s capital, with the strong possibility of a new government on Parliament Hill and continued interest rate cuts that he hopes will fuel a rebound in the local office market. “We’ve never overbuilt in Ottawa and we’ve never underbuilt,” Foucaud added. “Twelve per cent (vacancy), it’s a comfortable metric. We don’t have millions of square feet of oversupply that’s coming into our market in the next few months that are really going to boost that vacancy number way up.” Still, he conceded the federal government, the region’s biggest occupier of office space, is a bit of a wild card in the equation. Whether the feds expand their return-to-office mandates remains to be seen, Foucaud noted. In addition, Public Services and Procurement Canada, which manages the government’s real estate portfolio, has been tight-lipped about its previously stated plans to sell off millions of square feet of real estate in Ottawa. “It is clear they want to dispose of some of their assets,” he said. “Some of the assets that they own carry a large capital budget to maintain and repair. They’ll likely need to decrease some of that footprint and just reposition themselves as renters. It’s yet to be seen how much of it they’ll let go and where.” There’s a good chance that some aging federal office buildings will eventually be sold to developers and converted into housing, he added. “The question ultimately will be how much and when.”