Landlords, tenants ‘still figuring things out’ as downtown Ottawa’s office vacancy rate rises above 15%

Downtown Ottawa stock image

Ottawa’s office vacancy rate continued to climb in the second quarter, CBRE said in its latest Canadian market report, with the downtown office vacancy rate surpassing 15 per cent for the first time since the company began tracking the statistic in 1996.

The commercial real estate firm said Tuesday the capital’s office vacancy rate rose to 13.6 per cent between April and the end of June, up from 12.3 per cent in the first quarter.

The downtown core – which has persistently been the biggest trouble spot for building owners amid a widespread shift to remote and hybrid work during the pandemic – saw its office vacancy rate rise to 15.1 per cent from 13.2 per cent in the previous quarter.

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The increase comes as no surprise to District Realty CEO Jason Shinder, who says the situation facing downtown landlords could get worse before it gets better.

“People are still figuring things out with respect to the balance between remote work and in-person work,” said Shinder, whose firm manages more than 1.7 million square feet of office space in the capital, including several buildings on Bank and Elgin streets.

The veteran real estate executive added that while District Realty hasn’t seen a huge stampede of tenants looking to ditch their downtown space entirely, few occupants plan to increase their office footprints and there appear to be even fewer replacements eager to take over space others have vacated.

“Since Shopify left, there has been no big technology company announcing a move downtown, and there doesn’t seem to be a lot of interest in coming downtown,” he said.

Meanwhile, Ottawa’s suburban office vacancy rate increased to 12.4 per cent in the second quarter from 11.6 per cent in the previous three-month period. 

Still, CBRE Ottawa managing director Louis Karam noted that fewer suburban tenants shed office space last quarter than earlier in 2023. 

Unlike the downtown core, where negative net absorption rose from 186,000 square feet in the first quarter to nearly 292,000 last quarter, the suburban submarket saw office tenants return just over 80,000 square feet of space to landlands in the second quarter, down from more than 350,000 square feet in the previous three-month span.

“Right now, with the remote work conversation, there is more interest in suburban office space than there is for downtown,” Karam told OBJ on Tuesday afternoon.

No “magic bullet” will suddenly change that, Shinder said. 

‘I don’t think we’ve hit the bottom’

He expressed optimism that a wave of new multi-residential apartment projects in the core could attract younger residents who are more motivated to commute to nearby offices. But that alone won’t be enough to save many aging downtown towers that have outlived their usefulness, he added.

“I don’t think we’ve hit the bottom,” Shinder said. “I think that before you see positive absorption, I think you’re going to see more reuse of space, whether it’s some buildings being demolished, whether it’s some buildings being reused as residential, whether it’s some buildings being reused for something totally different” such as medical labs or self-storage space.

“I think that in order to solve the problem, we need to remove some inventory.”

The downtown office exodus wasn’t just confined to lower-quality class-B and C space. Even more sought-after class-A buildings took a hit in the second quarter, with 70,000 square feet at Minto Place being put back on the market, along with 37,000 square feet at Manulife Place.

But Karam said there are signs that Ottawa’s office market might be stabilizing after four consecutive quarters of negative absorption.

Tenants vacated a total of 372,000 square feet of space in the second quarter, CBRE reported, down from more than 530,000 square feet in the first three months of the year. 

In addition, the slowing pace of suburban vacancies increases suggests that the wave of downsizing in the tech sector may be subsiding, Karam said.

“This is not going to get resolved over the next two quarters,” he added. “But I think that rate of (negative absorption) is going to start slowing down. We’ll see where we stand next year at the same time.”

And Karam noted that compared with other parts of the country, Ottawa’s office market remains relatively robust.

The national office vacancy rate rose to 18.1 per cent in the second quarter, CBRE said, up from 17.8 per cent in the first quarter.

It was the highest level since the first quarter of 1994 when it was 18.6 per cent.

‘A perfect storm’

The downtown vacancy rate in Vancouver was 11.5 per cent in the second quarter, up from 10.4 per cent, while the rate in Toronto was 15.8 per cent, up from 15.3 per cent in the first quarter. Montreal saw its downtown rate rise to 17 per cent from 16.5 per cent.

“Canadian office markets are grappling with a perfect storm of a recession threat, interest rate hikes, tech sector weakness, tenants rightsizing and new supply of office space,” CBRE said in a news release.

“All of this is compounded by the continued uncertainty around remote work.”

The increase in the overall rate came as the downtown office vacancy rate in the second quarter rose to 18.9 per cent compared with 18.5 per cent in the first quarter. The suburban office vacancy rate was 17.1 per cent, up from 16.9 per cent.

Meanwhile, the downtown vacancy rate in Calgary was 31.5 per cent, down from 32 per cent in the first quarter. Waterloo Region’s downtown rate was 21.5 per cent compared with 22 per cent in the first three months of the year.

Karam noted that Ottawa’s downtown office vacancy rate remains the second-lowest in the country behind Vancouver, while its overall vacancy rate is tied for second-lowest with Waterloo Region. 

Meanwhile, average net rents in the capital are holding steady at just under $23 a square foot downtown and almost $16 per square foot outside the core.

“Like everybody else across the country, we’re seeing a little bit of an increase in the vacancy rate, but it’s still a stable market,” he said.

– With files from the Canadian Press

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