Feds’ four-day RTO plan could benefit lower-tier properties, new Avison Young exec says

Jordan Lovett, who officially joined Avison Young this week, told OBJ there are “a lot of questions” about the future of the local commercial real estate market as federal civil servants prepare to report to the office four days a week beginning July 6.

The gulf between the haves and have-nots in Ottawa’s office leasing market could narrow if the federal government runs out of space for its employees, the new head of Avison Young’s practice in the National Capital Region says. Jordan Lovett, who officially took over as managing director of the national brokerage firm’s Ottawa operations on Tuesday, told OBJ this week there are “a lot of questions” about the future of the local commercial real estate market as federal civil servants prepare to report to the office four days a week beginning July 6. “I think the big (question) is what the feds are going to do when it comes … to the office space,” Lovett said in an interview on Wednesday morning.  The veteran real estate executive, who served as vice-president of investments at Colliers’ Ottawa office before moving to Avison Young, said the “divide” between top-tier buildings and older properties with fewer amenities has widened in recent years as tenants returning to the office after the pandemic demanded better facilities. Indeed, while the vacancy rate for class-A downtown properties has hovered between 11 and 12 per cent in recent quarters, lower-tier buildings are more likely to have large blocks of empty space. In the first quarter, the vacancy rate for class-C buildings in Ottawa’s core topped 25 per cent. But Lovett says there could be light at the end of the tunnel for less desirable properties. The feds have already suggested they might be hard-pressed to accommodate their returning workers this summer, and Lovett says the space crunch could mean new opportunities for landlords struggling to fill their buildings.  Global Affairs Canada, for example, has decided to postpone the four-day plan for the majority of its workers due to a lack of space. Meanwhile, a spokesperson for Public Services and Procurement Canada, which manages most of the government’s real estate portfolio, told Radio-Canada earlier this month the feds may have to “reallocate” space in co-working sites to departments that need it. “There's been a clear flight to quality when it comes to A-class buildings, and the Bs and the Cs have really, really struggled,” Lovett said.  “But does that change if the feds come back and start taking (more space)? Because you can't build office space super-fast,” he added. “So if the feds are going to want some quality office space, maybe that's going to shake things up a little bit and it might be beneficial for some of the B and C buildings that might benefit from some of that overflow from some of the As if the feds come back with authority.” While some obsolete office buildings are being converted to uses such as housing, Lovett says he’s not expecting a flood of such projects. Instead, landlords are sprucing up properties and hoping the office market will bounce back. “You've seen some buildings get repurposed for other types of uses, but not all buildings are conducive to doing that,” Lovett explained. “So I think it's just a wait-and-see mentality and try to get tenants in as best they can for the time being. And I guess the good news is that there aren't any new office starts downtown, so there's no new supply coming. So eventually if the feds come back, you will see some of those buildings fill up.” During his eight years at Colliers, Lovett brokered more than $600 million worth of commercial and multi-residential real estate transactions.  Surveying the current investment landscape, he says he’s seeing a noticeable shift from the days when big institutional investors like pension funds dominated the buying of office towers. 

A case in point is Ottawa-based Regional Group’s recent $143-million acquisition of an 18-storey highrise at 150 Slater St. from Manulife Investment Management. It marked the first time in nearly three years that a downtown office tower was sold to a non-government buyer. “It just speaks to where institutional capital is right now,” Lovett said. “There's more of a focus for private (investors) and family offices to migrate to assets that perhaps they might not have had a chance at before. I think it's a matter of the cap rates being elevated compared to where they've been historically, and just the appetite for institutions to add office (properties to their portfolios) right now probably isn't where it was five years ago.” Lovett said Ottawa’s office buildings are no longer considered as safe an investment as they were in the years just before the pandemic, when the vacancy rate was in the single digits. “Any type of vacancy risk is something that scares groups off, but quality assets with a high (weighted average lease term), you're seeing some minor institutions come back to that type of asset,” he added. “I'm not sure what the future holds, but (generating consistent) income is where the focus has been.” A more robust federal return-to-office policy could spur an uptick in investment in the downtown office market, Lovett said, but it’s by no means a sure thing. “I don't think it's been very clear on what they're going to do exactly,” he said of PSPC and other federal departments. “I know that there's been some more chatter around coming back more days a week, but I don't know if they have enough space to do that. So I think that'll all become more clear as this unfolds over the next couple of years.” The market for smaller commercial properties is frothier, Lovett said. Skyrocketing construction costs have slowed construction of small-bay industrial sites, sparking fierce competition for the few buildings that do come up for sale. “I think there's some good momentum for owner-occupied purchases, whether it be for office or for industrial space,” he said, adding that when those types of properties hit the market, “they're usually sold fairly quickly if they're priced correctly.” The 44-year-old earned a degree in business administration at Wilfrid Laurier University before moving to Ottawa two decades ago to take a job as an insurance underwriter at Export Development Canada. He later spent six years at Roynat Capital, a subsidiary of Scotiabank, where he helped secure financing for small and medium-sized businesses. Now firmly entrenched in the commercial real estate industry, Lovett says he’s eager to bring those previous experiences to bear.   “I've seen things that perhaps some of the more junior brokers haven't seen before,” he said, adding he’ll try “to guide them through some of the mistakes that I might have made, or learning experiences that I had while I was doing those transactions.  “Throughout my career, fortunately or unfortunately, depending on how you look at it, I have been through economic (down) cycles. We're in one now. It seems like there's some uncertainty out there geopolitically and economically. How to focus on continuing to produce in uncertain times is something that I can help some of these younger brokers with.” Lovett says he’s “cautiously optimistic” that better days are ahead for Ottawa’s commercial real estate sector. “There is some uncertainty out there … but I think that we're in a better place than we were during that higher-interest-rate environment that we were in a few years ago.”