Ottawa’s office vacancy rate stabilizes in Q3 as conversion trend spreads, reports say

Ottawa downtown look at Elgin

Ottawa’s reeling office rental sector showed signs of stabilizing in the third quarter as several downtown highrises that are slated to be redeveloped into residential units were taken off the market and leasing activity perked up in Kanata, two new reports say.

While the headline numbers were slightly different in the latest market updates from CBRE and Colliers, two of Canada’s largest brokerage firms, the bottom line was similar. 

Both companies suggested that landlords seem to be making headway in stemming the mass exodus of tenants that has hollowed out office properties across the National Capital Region.

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According to Colliers, Ottawa’s overall office vacancy rate dipped to 12.6 per cent at the end of September, down from 12.9 per cent in the second quarter – the first quarter-over-quarter decline in the city’s vacancy rate since early 2022.

Colliers said the numbers signalled a “positive shift” in the local market as several aging downtown office towers that have outlived their usefulness are being readied for conversion to residential buildings. As a result, the class-C office vacancy rate in downtown buildings declined to 20.9 per cent from 26.1 per cent in the second quarter.

“This transformation reflects a strategic response to Ottawa’s evolving needs, increasing the supply of urban rental housing units and contributing to revitalizing Ottawa’s downtown,” Colliers said in the report released Monday, adding it expects the trend to persist in the face of soaring demand for rental housing.

CBRE also highlighted the removal of several downtown properties that are earmarked for residential use, including 360 Laurier Ave. W., 150 Laurier Ave. and 130 Slater Ave., from the city’s office inventory. 

“I think in the long run, I suspect that we will see a few more of these conversions happening in Ottawa,” Louis Karam, the managing director of CBRE’s local office, told OBJ on Tuesday. “It is not the silver bullet that is going to fix everything. But for those buildings where it’s actually feasible, this is going to be one solution for both office (vacancies) and multi-res (shortages).”

But according to CBRE, Ottawa’s overall office vacancy rate continued to rise in the third quarter, ticking up slightly to 13.6 per cent from 13.5 per cent at the end of June. 

That’s because the firm included an additional 150,000 square feet of newly vacant space at the Canada Mortgage and Housing Corporation’s Montreal Road campus in its latest calculations. CMHC, which owns the buildings, previously occupied the entire space, meaning it wasn’t considered part of the region’s “competitive” office inventory and was not factored into the vacancy rate as determined by the major brokerages. 

However, that changed when the Crown corporation put the property on the market at the end of August, said CBRE’s Ottawa-based managing director Louis Karam. But Colliers did not include the CMHC property in its third-quarter report, accounting for most of the discrepancy between the two companies’ figures.

Still, Karam said even a marginal rise in the vacancy rate, as opposed to a decline, is cause for optimism. At the same time, he added, the sector remains in a state of flux. 

“We’ve been saying that it’s going to get worse before it gets better,” he said of the city’s steady rise in office vacancies since the start of the pandemic. “I’m not yet ready to say that we’re finding equilibrium. I’d like to see these trends continue over a quarter or two before getting to that level.”

Karam also noted the ongoing “flight to quality” is driving up vacancy rates in class-B and C buildings while the amount of empty space in class-A buildings continues to fall.

“We’re seeing this clear trend continue with demand for best-in-class properties remaining strong,” he said.

Meanwhile, Kanata began showing signs of a resurgence in the third quarter. 

The overall vacancy rate in the west-end tech hub dropped nearly a full percentage point to 15.3 per cent, CBRE reported. The class-A rate fell by 1.3 percentage points to 17.3 per cent, thanks to deals such as Wind River’s move to lease 58,000 square feet of space at 425 Legget Dr. and Syntronic’s pickup of 67,000 square feet at nearby 340 Legget.

“Businesses continue to prioritize well-amenitized, high-quality buildings, and that’s going to continue, whether it’s in Kanata or downtown,” Karam said.

Colliers also pointed to “significant leasing activity within the Kanata North Business Park by technology tenants” in the third quarter.

“There’s a bit of a shift with tenants looking more in the suburbs instead of the downtown,” explained the firm’s Ottawa-based research analyst Paul Mullin, adding that perks such as free parking and a shorter commute for many employees could be luring companies from downtown.

Mullin also noted that more landlords are rolling out additional incentives to prospective tenants such as free rent, cash for fit-ups and fully furnished “model suites” that are ready to occupy.

Soaring construction costs have made the “turnkey aspect” of such suites particularly attractive to many budget-minded renters, he added.

“Tenants can see what the possibilities are for the space,” Mullin said.

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