Downtown stagnation drives up Ottawa office vacancy: report

A shrinking federal government workforce and lack of private-sector growth to replace it is driving up Ottawa’s office vacancy and leading to discounts for prime space.
Colliers International said in Quarterly Office Market Report that the office vacancy rate in the nation’s capital in this year’s second quarter was 8.7 per cent, up from 8.6 per cent in the first quarter and gaining more than a full percentage point from a year earlier.
Government downsizing affects downtown market
Downtown is where most of the weakness is, with the vacancy rate there rising 40 basis points over the quarter to 7.3 per cent and the average asking rent for Class A office space falling $1 to $26 per square foot annually.
“I think that’s partly as a result of downsizing within the federal government, downsizing in the private sector, a lack of any kind of new significant growth in the private sector and really a lack of new industry coming into the market,” said Kelvin Holmes, Colliers’ managing director for Ottawa.
Putting further pressure on downtown landlords, the report noted, is the 21-storey, 360,000-square foot office tower Morguard Corp. is aiming to have built on centrally located Elgin Street in the coming months. Holmes said there is a significant amount of interest in this new building, but it’s coming from tenants that are already in downtown Ottawa.
“The tenants that are going to be moving into 150 Elgin St. are going to be leaving some pretty big holes in some of the other A-class buildings,” Holmes said. “There is no internal growth within the core and there is no new industry or new growth coming to the downtown core from outside the city.”
Michael Church, Avison Young’s managing director of office leasing in Ottawa, said Colliers’ documented drop in asking rates for Class A downtown space tells just part of the story of concessions landlords are making to secure tenants. Free rent for certain periods, cash incentives and generous termination provisions are also part of the mix, he said.
“The asking rate’s dropped to $26, but what does a landlord have to spend in order to buy that $26 asking rate?” he said.

Graph from the Colliers International Quarterly Office Market Report for Ottawa
Less vacancy in suburbs
Ottawa’s suburban office market had a vacancy rate of 9.7 per cent in the last quarter, which was down 10 basis points from the previous quarter. Much of that was attributed to strength in the west-end area of Kanata, where the vacancy rate dropped 1.7 percentage points to 13.7 per cent.
Holmes noted that “Kanata still is the centre of Ottawa’s high-tech industry,” though the strength seen in the area is not monumental.
“We are seeing some modest growth in the high-tech industry,” he added. “We’re seeing some new startups, but the new startups are taking very small pockets of space as they move from their homes, and so on.”
Church said it’s encouraging to see Kanata’s office market improve after vacancy rates shot up to about 35 per cent in the wake of the tech bust a decade ago.
“There’s a definite floor in Kanata that is up appreciably over the last 18 months,” he said.
Class B space in the suburbs was in high demand in the last quarter, with the vacancy rate for these facilities plunging 14 percentage points to 18.3 per cent, and the average asking rent for this kind of space in Kanata rising 50 cents to $11 per square foot.
Living and working in the ‘fringe’
In between downtown and the suburbs is an area Colliers’ classifies as the “fringe,” and it saw its office vacancy rate fall 50 basis points to 5.7 per cent and the average asking rate for space rise $1 to $22 per square foot, according to the report.
An area highlighted was the Byward Market, which is walking distance from Parliament Hill in an area many Ottawa residents think of as part of the core, though it is just east of the city’s main office-building district.
“The fringe is attracting a lot of attention because you can get some pretty good space for less than what you would pay in the downtown core. (It’s) more than what you would be paying in the suburbs, but you’re still getting a lot of the amenities associated with being downtown,” Holmes said.
The Colliers report said technology companies are among those showing interest in “fringe” areas of the city. Holmes noted that many are firms with young staff who are choosing to live in urban areas of the city that are hotspots for condo development.
“We’re starting to see a shift where a lot of the suburban businesses are seeing their employees move into the condominiums being built in the fringe areas, and they’re thinking, ‘You know what? Maybe we should be following them so they can live, work and play all in the same environment.’ It’s good for recruiting,” Holmes said.
A look ahead
Colliers forecasts that Ottawa’s office vacancy will continue to rise and stay at about nine per cent before some modest reductions next year, with the downtown market included in the recovery.
Holmes said this is based on expectations landlords will be sufficiently aggressive in their incentives to reverse rising vacancies and not because of any significant increase in demand.

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