A major real estate firm’s purchase of a north Kanata office portfolio has the potential to change the face of the west-end office market in 2015.
KRP Development Group’s $69-million acquisition of a seven-building, 411,000-square-foot office portfolio currently administered by Colonnade Management will give the real estate arm of the Terry Matthews business empire control of 50 per cent of Kanata’s total commercial market.
While that’s not a true monopoly, the deal effectively leaves KRP in possession of virtually all the quality vacant office space in north Kanata.
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In addition, almost 85 per cent of the remaining empty space not in KRP’s control is located in only four buildings – two owned by Morguard, one by Gilmore Printing and one by the Regional Group. These buildings range from 45,000 to 106,000 square feet and account for a large portion of Kanata’s current vacancy rate, but they are simply too large to be easily divided for smaller tenancies.
A quick look at the remaining space reveals some startling facts. Not counting Kanata south, including all the buildings clustered near the Canadian Tire Centre, and the four big buildings mentioned above, less than 60,000 square feet of vacant inventory remains for small to medium-sized tenants to lease – a measly 3.36 per cent of the remaining space available in the March Road corridor.
In short, if you’re a small to medium-sized tenant looking to lease an office near the Brookstreet Hotel, virtually all roads will now lead to KRP.
Already Cresa has seen the new owners scupper deals at their new holdings where the rents fall below what KRP considers to be in line with the new realities of the market. This is a sure sign of the new landlord’s intent to leverage its “micro-monopoly” sooner rather than later.
As a result, Cresa is predicting that average Kanata rents will rise from the current rate of about $12 per square foot to as much as $15 in the next 12 months. We are also expecting to see a corresponding drop in the amount of free rent and cash incentives.
This process could be accelerated, depending on how quickly the federal government takes occupancy of the 2.3-million-square-foot former Nortel campus it purchased in 2010. With the feds having publicly stated their intent to move 8,500 National Defence employees to the campus starting late next year, it’s a good bet the market will continue to tighten after those workers move in.
The good news is that even as the north Kanata market catches fire, there are still great deals to be had in other parts of the west end and in more central parts of town.
The downtown market is especially soft at the moment and, in the face of steep rent increases in Kanata, it is possible that the city’s next wave of tech startups will choose to locate near the ByWard Market or Lansdowne Park, where fierce bidding wars for tenants continue to accelerate.
Darren Fleming is a managing principal at Cresa Ottawa, which tracks real estate trends in the capital region. He can be reached at email@example.com.