‘Room to grow’ in the core: Industry observers say higher downtown vacancy rates not necessarily a bad thing

Most analysts agree 2015 was a year of uncertainty in Ottawa’s commercial real estate sector, with a federal election and a topsy-turvy economy leaving everyone wondering where the market was headed.

Now that the dust has settled and Justin Trudeau’s Liberals are in power on Parliament Hill, the future is beginning to come into focus. But anyone expecting the new government to suddenly go on a hiring and leasing spree and reverse years of office downsizing in the core needs a reality check, according to experts looking ahead to 2016.

Even if the feds do decide to eventually bolster their workforce and add to their downtown footprint, it’s going to take time to set the wheels in motion, they say. And that almost certainly won’t happen this year.

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“They just can’t hire 20,000 people back in any timely fashion,” says Darren Fleming, principal managing partner at Cresa Ottawa. “It just doesn’t work that way.”

Ottawa’s No. 1 downtown office tenant has been scaling back its presence for several years, the result of job cuts and a push toward more efficient use of office space under the federal government’s Workplace 2.0 initiative.

The Liberals appear ready to open the federal coffers a bit, but any resulting benefits to local commercial landlords will take “a while to trickle down,” says Shawn Hamilton, vice-president and managing director of CBRE’s Ottawa office.

While the feds might pull the trigger on a few small deals that were put on the back burner during the election campaign, the “air of optimism” many people in the industry say they are feeling right now won’t likely begin to bear fruit until at least 2017, he says.

CBRE’s 2016 projections back up his assessment. The brokerage predicts central Ottawa’s overall vacancy rate will tick slightly upward to 9.5 per cent from about nine per cent, thanks largely to vacancy rates that hit more than 10 per cent in the class-B sector and a whopping 27 per cent among class-C buildings in the fourth quarter of 2015.

“The folks who are hurting right now are the B- and C-class landlords,” agrees Mr. Fleming, adding vacancy rates in those categories will likely get worse for owners before they get better.

The trend toward smaller desks and more open workspaces in both the public and private sectors means tenants who were previously paying in the ballpark of $30 per square foot for class-B and class-C offices suddenly don’t need as much space and can afford to lease class-A property in the $45 bracket, he explains.

“Right now tenants are saying, ‘Rather than being in 15,000 (square) feet of class-C space or B space, I can be in 10,000 feet of class-A space and pay about the same amount of total rent,” Mr. Fleming says. “This is what’s been happening. All of a sudden, being in these dingy old buildings in big, bulky, expensive spaces is just not working anymore.”

That could trigger a downtown renovation boom if owners of class-B and class-C offices get tired of waiting to fill them and decide to remodel or even rebuild them completely.

“We’re definitely seeing a complete change in the way office tenants house themselves,” Mr. Fleming says, noting the move toward smaller desks, more glass and natural light. “If a landlord doesn’t refresh their space, it just sits empty. Landlords are now definitely re-evaluating how long they’re going to keep a space empty before they gut it.”

Bruce Wolfgram, vice-president of tenant representation at Primecorp Commercial Realty, agrees.

“There’s been some anxiety among developers over the last couple of years over what to do with B or C buildings which are not necessarily made for today’s market,” he says. “Some of these buildings can be retrofitted.”

Further clouding the picture, a number of class-A properties in the core are either being refurbished or are losing major tenants, notes Mr. Fleming.

For example, H&R REIT has almost finished its multimillion-dollar makeover of Place Bell at 160 Elgin St., which currently has tens of thousands of square feet of vacant space available for rent.

“That building needed an upgrade, but once it has it, will it be competitive?” Mr. Fleming says.

Meanwhile, Gillin Engineering & Construction will be looking for a new tenant at 234 Laurier Ave. W., where it is leasing 150,000 square feet of space to the Bank of Canada while the central bank’s headquarters are being renovated.

“Shortly, they’re going to be marketing it,” he says. “The question is, who’s going to go there? That’s a class-A building with a huge piece of upcoming vacancy.”

Just outside the downtown core, 275,000 square feet of practically brand new class-A space still sits empty in Bona Building and Management’s 10-storey office tower at 140 Jeanne Mance St. Although the federal government has long been rumoured to be Bona’s No. 1 target, the company might be willing to throw incentives at alternative tenants to pry them away from downtown buildings such as the World Exchange Plaza, Mr. Fleming suggests.

“If it is, and you’re the World Exchange Plaza, how low will you bring your rent to avoid them leaving? That’s what these outlying, one-off problems do to the market. They create this uncertainty.”

But such volatility can also be a positive, Mr. Hamilton and Mr. Wolfgram argue, because it opens up opportunities for fledgling private-sector organizations to get their legs under them.

They noted the growing presence in the city of Regus, a Luxembourg-based company that offers flexible leases on fully furnished office space to clients ranging from small startups to multimillion-dollar companies.

Regus recently opened its third location in Ottawa at 116 Albert St., a “good thing” in Mr. Wolfgram’s mind.

“It means there’s more and more small companies percolating out there,” he says.

Mr. Hamilton interprets Regus’s expansion as proof the city’s core is on the rebound.

“That tells me that they see the strength of Ottawa and they see the strength of business coming to Ottawa,” he says. “Right now is the first time in maybe 20 years that we’ve had some room in the downtown core for something other than the government to happen. It’s the likes of Regus that allow the footholds for companies to come to Ottawa and germinate into larger organizations.

“I think for the city as a whole, these higher vacancies aren’t necessarily a bad thing. They are going to be the space that allows new business to grow in the core.”


LeBreton Flats

“I think if we had Lansdowne times 10 on LeBreton Flats, we would have a state-of-the-art, awesome (project) that would rejuvenate the core and provide that live/work/play balance that we all talk about,” says Mr. Fleming, referring to the two shortlisted redevelopment proposals that both include an NHL arena for the site.

“Any other use there is a total joke. We’ve got lots of museums. Bring the Sens downtown and they will do for the core what the (Canadian Football League’s) RedBlacks did for Lansdowne and that would be tremendous. Government as a developer to me doesn’t make a hell of a lot of sense. I pray that we’re not dumb enough to mess this up.”

A revitalized LeBreton Flats, Windmill Development Group’s Zibi project at the old Domtar lands and the imminent arrival of light rail could converge to be “powerful factors” in rejuvenating the western edge of downtown, says Mr. Hamilton.

“We’ll be watching with bated breath what happens there,” he said. “That could be an absolute defining jewel for the city. I think that could really be the start of the new Ottawa.”

The continued rise of “urban tech”

“We’re starting to get the hints that there’s a halo effect around Shopify or a critical mass starting to develop in the core,” says Mr. Hamilton, referring to emerging tech leaders with major operations in Ottawa such as data networking solutions provider CENX and business analytics software maker Klipfolio that have chosen to set up shop in Centretown. “I think that should start slowly to attract more interest in the downtown core that will hopefully pick up momentum.”

Employee-driven office design

“This means allowing employees to specify their desired space as part of their hiring,” says Primecorp Commercial Realty’s Bruce Wolfgram. “Talented workers are increasingly hard to find, as any company will attest to.  Companies are becoming more aggressive in bringing in the talent they require. One way to do this is to build the space that appeals to the potential employee, rather than forcing the employee to fit into a model that the company had built for itself. This will mean a greater mix of workspaces along with shared spaces, cafes, et cetera. Ultimately, offices will become less cookie-cutter in their design.”

Ciena Canada’s Kanata expansion

Networking equipment maker Ciena announced last spring it was moving into the 173,000-square-foot former BlackBerry building on Innovation Drive in Kanata. The company, which employs 1,500 people in the capital, has also started construction on two new buildings next door that will total more than 250,000 square feet.

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