Opinion: Ottawa reaches its pivot point

Feds’ ‘flight to quality’ casts shadow on commercial real estate market

Barely a year ago, the president of one of the country’s top commercial real estate research firms made a bold prediction about the direction of the Ottawa market.

Altus InSite’s Sandy McNair said the federal government appeared to be in the process of vacating upwards of 11 million square feet of existing office space as it modernized its real estate footprint in the National Capital Region. There are signs this forecast is coming true.

Already the waves are being felt across the market as Public Works inexorably continues to exit older and obsolete buildings in favour of new or substantially retrofitted properties. And while many industry pundits point to a few public-sector entities such as the Bank of Canada and the Department of Justice – both of which have recently signed leases for big blocks of downtown class-A space – there are more and more large pockets of space appearing all over town. And, for the most part, that space is not being leased.

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It’s been a year since the federal exodus began and it appears the pain will be focused primarily in the class-C and the lesser end of the class-B market. These are the buildings that no longer can meet the newest federal accommodation standards and Public Works can’t seem to get out of them fast enough.

At the same time as the federal public service’s footprint is decamping to greener pastures – and greener buildings – advances in modern office space design are allowing tenants to get even leaner.

Either through the elimination of bulky CRT monitors in favour of flat screens and laptops, or by creating multi-functional, hyper-efficient spaces, the office space of today is generally more compact than ever, allowing some organizations to shrink by 10 to 20 per cent simply by purchasing new desks and workstations.

When combined with a broader adoption on the part of employers of allowing some employees to work from home on a full- or part-time basis, many firms are seeing even more of a reduction in their leased office space.

Furthermore, the current economic climate doesn’t make it easy to sell the boss on the idea of spending big bucks on expanding into new space. For many organizations facing funding cuts and/or poor markets overseas, growth simply isn’t in the picture right now. Instead, many are choosing to sign shorter-term leases and conserve capital.

What this means is that at the same time as large blocks of space are coming onto the market, the available pool of tenants interested in leasing them isn’t very deep. While some organizations are making moves, they generally leave larger pockets of space behind them in buildings in need of significant upgrades.

As of today, Ottawa’s office vacancy hasn’t hit an alarming rate anywhere in the city, yet the number of problem spaces that have been vacant for well over a year grows a little larger every day. Short of an unexpected economic boom, there is little chance of them being leased any time soon.

Darren Fleming is managing principal of Cresa Ottawa.

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