With tenants ditching office space across the city, the real cost of rent is falling to levels not seen in years as landlords offer discounts and other inducements to fill vacancies, industry insiders say. While headline rental rates haven’t budged much during the pandemic, real estate observers acknowledge that many clients are now paying less […]
With tenants ditching office space across the city, the real cost of rent is falling to levels not seen in years as landlords offer discounts and other inducements to fill vacancies, industry insiders say.
While headline rental rates haven’t budged much during the pandemic, real estate observers acknowledge that many clients are now paying less for office space in Ottawa than they were in the pre-COVID era.
Across the National Capital Region, landlords are offering “significant incentives” to tenants, such as months of free rent and more capital to help pay for renovations, says Hugh Gorman, CEO of Colonnade BridgePort, the city’s largest privately owned property management firm.
“Those things have always been there, but they’re just a little more aggressive now,” the veteran real estate executive explains.
“I think you’ve got to be in tune with what’s happening in the market. I think any landlord that’s not being creative and being aggressive is falling behind very quickly. It is about occupancy right now and kind of weathering the storm.”
Indeed, Ottawa is a tenant’s market, from downtown to the tech hub of Kanata, as office towers have hollowed out amid the shift to hybrid and remote work under COVID-19.
The capital’s overall office vacancy rate rose to 13.6 per cent in the second quarter, according to real estate firm CBRE, up from 12.3 per cent the previous quarter.
Landlords in the downtown core have been particularly hard hit, with the vacancy rate reaching 15.1 per cent in the quarter ended in June. That compares with 6.5 per cent at the end of 2019, before the pandemic struck.
As a result, building owners are scrambling to offer various inducements – and bargain-hunting tenants are taking full advantage.
“I think (tenants) see the opportunity in the marketplace right now, and they’re moving,” Gorman says, noting that tech firms in particular have been “very aggressive” at locking in long-term leases at favourable rates.
Alan Doak, a partner at Ottawa-based brokerage Proveras Commercial Realty, agrees.
Doak predicts more and more tenants in downtown properties will see “significant decreases in rental rates mixed with better and better incentive packages” as owners push to sign tenants to long-term deals, even if it is for less space than those companies occupied before.
“I think we’re just starting to see a real highly competitive environment evolve amongst multiple (office) towers,” Doak says.
Most vacant class-A office space in the core is now concentrated in a handful of properties, including Constitution Square, the Sun Life Financial Centre, the World Exchange Plaza and 55 Metcalfe St., notes longtime broker Shawn Hamilton, another partner at Proveras.
But incentives could spread to other properties in the core as short-term lease extensions signed during the pandemic start to expire and flood the market with even more vacant space, Doak adds.
“We don’t actually know how low people will go,” he says. “We haven’t seen the bottom yet.”
Net effective rents falling
Determining exactly how much tenants are paying for space in the current market often requires a bit of digging.
Landlords typically like to publicize asking rents because rental rates help determine a building’s value. Research shows those rates haven’t changed much over the past few years.
According to real estate firm Altus Group, the average asking net rent in a class-A building in downtown Ottawa right now is just over $21 per square foot. CBRE’s latest report pegged it slightly higher, at $22.90.
But most observers agree that the rate tenants pay after incentives have been deducted – known as net effective rent, or “NER” – has been declining throughout the pandemic.
Gorman estimates that average NERs in downtown properties have fallen about 20 per cent since 2019, with rates at “Triple-A” buildings dropping from between $23 to $25 per square foot before COVID, to closer to $18 now.
Doak agrees, saying some properties that fetched NERs in the range of $25 a square foot in the first quarter of 2020 are now bringing in closer to $15 a square foot.
Altus, meanwhile, says its data, derived from surveys of owners, brokers and landlords, hasn’t shown as much of a decline in NERs since 2019, when they ranged from $14 to $17 per square foot.
However, Raymond Wong, the firm’s vice-president of data operations, says recent anecdotal evidence suggests NERs are on a downward trajectory in the capital.
“It’s a very competitive landscape,” Wong says. “Net effective rates are coming down, but maybe not at the same rate as compared to Toronto or Vancouver.”
He says one explanation for Ottawa’s more gradual descent could be that its downtown office market hasn’t been hit with the same glut of sublet space as many other major Canadian markets.
According to CBRE, 11.3 per cent of all vacant office space in downtown Ottawa last quarter was on the sublet market, compared with nearly 29 per cent in Toronto.
“You’re not experiencing the same issues with your space competing with sublet (space),” Wong explains.
Deeper incentive pool
Veteran broker Lindsay Hockey of Colliers International also says that while headline asking rents are holding firm, “the incentive pool is a lot deeper” than it used to be.
Still, he says the Ottawa landlords and property owners he deals with are “not going to the same extremes that we’re seeing in Toronto,” adding he’s “hesitant to say” inducements are “happening across the board in a big way.”
Building owners outside the core are also offering more incentives to tenants as vacancies continue to rise in those submarkets. Doak says landlords in Kanata are cutting rates and offering incentives that include up to a year’s free rent and help with fit-up expenses in “a race to provide the best value.”
Rents in class-A buildings in the west-end tech hub that were nearing $30 a square foot before COVID have fallen back to the mid-20s, he says.
KRP Properties president Martin Vandewouw, whose firm owns and manages more than three million square feet of commercial real estate in Kanata, wouldn’t reveal how much NERs in its portfolio have changed over the past four years.
Vandewouw said the types of incentives landlords are willing to offer vary according to a tenant’s particular needs and the specifications of the building itself.
“It depends on the deal,” he says. “Every deal is different.”
After a spate of short-term extensions early in the pandemic, landlords and brokers now say they’re seeing a shift back to more five- and 10-year leases as companies fine-tune their back-to-work strategies and get a better sense of their overall real estate needs for the next few years.
Gorman says today’s falling NERs are really a reflection of trends that have been snowballing since the start of the pandemic and are still working their way through the system.
“It’s not like hotels, where the rate is set every night,” he explains. “There is really a time-lag factor.
“The feeling is in terms of occupancy, we’re at the bottom of the trough, and now we’re starting to see it come back out the other side. I think the worst is over. Tenants that are proactive are trying to take advantage of market conditions and are committing to space now. I feel like the tide is turning, but rates will lag and won’t catch up … probably for another 18 to 24 months.” 
