Why Ottawa’s office vacancy rate might not be quite what it seems

While the rate has declined for three straight quarters, it's not necessarily all due to a surge in leasing activity, industry insiders say

David Sali

April 3, 2024
3:50 PM
ET

Organizations: Capworth Commercial Realty, CBRE, CLV Group, Colliers, District Realty, Katasa Group

People: Denis Shank, Louis Karam, Warren Wilkinson

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Ottawa’s office vacancy rate dipped slightly in the first quarter as leasing activity picked up in the Kanata tech hub and a pair of downtown properties were taken off the market with the aim of being converted to residential space. In their latest office market reports released this week, CBRE and Colliers both reported a decline in vacant office space in Ottawa in the first three months of 2024. According to CBRE, the city’s office vacancy rate was 13 per cent in the first quarter, down from 13.3 per cent in December. Colliers pegged the vacancy rate at 12 per cent, a slight drop from 12.2 per cent in the previous quarter. Average rent for class-A office space in downtown Ottawa was $23.29 per square foot in the first quarter, CBRE said, up slightly from $23.18 at the end of 2023. It’s the third consecutive quarter that the city’s office vacancy rate has declined following a prolonged commercial real estate slump fuelled by the shift to remote and hybrid work during the COVID-19 crisis. Warren Wilkinson, senior managing director of Colliers’ Ottawa office, said employers are becoming “more confident” in locking in to longer-term leases as they figure out their return-to-office plans in a post-pandemic world. “We had a very (lengthy) period of short-term leases, and now we’re kind of back to those five-year, seven-year, 10-year leases,” he said. “That’s not everybody, but it’s enough to see the leasing velocity increase. People are more confident in making those types of decisions and committing to space.” The Kanata submarket was a particular bright spot. The tech hub’s overall office vacancy rate fell nearly three percentage points compared with the previous quarter, dropping to 13.2 per cent. Much of that positive absorption was driven by software firm Solace’s deal to sublease 57,000 square feet of space at 4000 Innovation Dr. from Mitel, CBRE Ottawa managing director Louis Karam explained. “In a market like Ottawa, a few transactions can tip the scale one way or another,” Karam noted.

More downtown office conversions on tap

At the same time, the downtown core saw two significant chunks of inventory removed from the office market in the first quarter with the intention of being converted to residential units. District Realty plans to repurpose 143,000 square feet of office space at 200 Elgin St., while the City of Ottawa announced last month it was leasing 29,000 square feet of space in a vacant office building at 230 Queen St. for transitional housing. That helped push Ottawa’s class-B vacancy down to 15.1 per cent last quarter, a drop of more than four percentage points, Colliers said. Yet Ottawa’s overall downtown vacancy rate barely budged, declining a mere three basis points from the previous quarter. Meanwhile, CBRE – which predicted earlier this year the downtown vacancy rate would rise to 15 per cent by the end of 2024 – pegged the percentage of vacant office space in the city’s core at 14.6 per cent, up from 14.2 per cent in December. Veteran commercial real estate broker Denis Shank said as tenants’ leases expire, they are choosing to relocate to smaller spaces in higher-quality buildings with more amenities. Many of his clients, he said, are reducing their office footprints by up to 50 per cent, yet their rent bills are often the same as they were before. “Every single client that I have has downsized,” said Shank, president and broker of record at Capworth Commercial Realty. “Tenants will say, ‘I’m going to take less space, but I want a nicer working environment.’ The executive teams want to make it more attractive for those workers to go back to work.” Tenants are hungry for smaller chunks of space of up to 5,000 square feet in class-A buildings, particularly if it’s already been fitted up, he explained. “Bigger plates … full floors, half-floors, they’re not moving,” Shank said. “Any landlords that have been investing in those smaller suites are getting better traction.” Shank, who represents several tenants who are being forced to leave 200 Elgin St. as well as a soon-to-be-converted office building at 130 Slater St., says the vacancy rate doesn’t paint a totally accurate picture of what’s really happening in the downtown office market. He notes the conversion trend has led to a drop in inventory that needs to be taken into account when assessing the office sector’s overall health. “I think it’s a bit skewed when they’re saying (the vacancy rates) are going down,” Shank said. “In reality, there’s downsizing. Companies are still in the process of (determining), ‘What do I really need?’” While he describes himself as a “glass-half-full” kind of guy, Shank predicts more pain ahead for commercial landlords, especially for owners of properties with fewer bells and whistles to entice workers back to the office. In addition, many leases signed just before the pandemic are set to expire this year, he added, meaning landlords will likely have to keep dangling incentives such as free rent in an effort to fill their buildings. “I think we’re going to see more bleeding,” Shank said. “It’s going to get worse before it gets better.” Over at Colliers, Wilkinson said he’s hopeful there’s light at the end of the tunnel, pointing to a report from Deloitte earlier this week that predicts Canada will likely dodge a recession despite ongoing downward pressure from higher interest rates. “How is that a bad thing for any major metropolitan centre?” he said. “It’s hard not to be optimistic. I don’t think (the office market) is as doom and gloom as everybody says.” The downtown class-A vacancy rate is a relatively robust 8.6 per cent, Wilkinson noted, adding there’s more good news to come. “There are a couple of big deals out there that should be announced in the next quarter,” he said. “I think we’ll see class-A (space) remain healthy.”