When the federal government initiated workplace modernization programs almost a decade ago, there were fears in Ottawa it would result in millions of square feet of empty office space as the feds densified their facilities. What has actually happened is the opposite.
Government-occupied office space in the National Capital Region (NCR), which includes Ottawa and Gatineau, has increased by five million square feet. Almost a million square feet has been leased during the past year and as the latest GCworkplace initiative is expanded, millions more square feet of existing office space must be extensively renovated and modernized.
“Late-2018 was the first time in almost five years that the city’s overall vacancy fell below eight per cent, a trend that has continued through 2019,” said Nathan Smith, Cushman and Wakefield’s senior vice-president of its Capital Markets Group, during a discussion of federal government CRE trends at the Ottawa Real Estate Forum on Oct. 17.
“The main drivers were obviously Kanata’s continued (tech-related) growth, but in no small part fed leasing activity, especially in their East-End suburban market.
“As we move downtown into the fed-dominated core we can see overall it’s 6.2 per cent, with class-A vacancy at 4.4 per cent, or virtually full with some noted exceptions.”
Federal government major office occupier
Federal government departments and agencies occupy about 40 million square feet of office space in the NCR, including about 60 per cent of the office space in the central business district.
That’s unlikely to change after Monday’s federal election returned a Liberal government, albeit in a minority parliament.
As GWL Realty Advisors senior director, National Capital Region, Michael Zanon noted: “Historically, Liberal governments have been much better for Ottawa than a Conservative government in terms of their spending programs and employment. I don’t see there being a big shift going forward.”
Updated workspace initiatives have led the feds to the GC Workplace program, which is radically different from where the modernizations started. Initially, the goal was to reduce office space by about 12.5 per cent.
Facing intense competition to hire new, younger talent for its aging workforce and low unemployment rates, the government’s focus is on employee health and wellness. That follows a trend across the office industry.
“It started out as a cost-saving measure,” said Brian Wallace, vice-president, commercial properties at Dream Asset Management, which is a partner in Ottawa/Gatineau’s massive Zibi mixed-use development just west of the core.
“Then, you see the next iteration and they are starting to talk about collaboration and greenness. Then, you go to the current. Now, health and safety is being considered more heavily.
“If you are looking at how this is going to affect commercial real estate and office space specifically, if you start from the point of view of wellness and health, then there’s definitely great opportunity to create that stickiness (for tenants) by participating in the GC Workplace.
“In that upgrading, there are going to be some significant vacancies, but it is a fantastic opportunity to make your building sticky by getting on board with these initiatives and changing what the offering is.”
Wellness big selling point for Zibi lease
Zibi used that as a major selling point to secure a 158,000-square-foot government lease this year at a new eight-storey, 185,000-square-foot class-A office building it is constructing along the Ottawa River. The building is to be delivered in just two years (servicing is already in place), and is just a short walk from one of Ottawa’s new LRT stations.
“If you can have a development that is already well-positioned for wellness, like waterfront for example, it can give you quite an advantage.”
The feds have also committed to increasing the pace of workspace modernization. Prior to their re-election, the Liberals targeted having 25 per cent of their space up to GCworkplace standards within three years. Right now, Smith said, it’s about seven per cent.
“It’s very difficult to convert space in an existing building when the occupant is there. We’ve seen that in our leased buildings,” Zanon said. “To do that, you need big blocks of space. They recently backfilled L’Esplanade Laurier, swing space, to do some of that at Place du Portage.
“If they are serious about getting those bigger targets, they might be coming out with a bigger tender requirement, because how else are you going to do it?”
Millions of feet of space are expected to be exchanged during the next decade or so to accommodate the renovations and upgrades.
Older buildings well-suited for GCworkplace
Michael Swan, the assistant VP of property management and leasing, office and industrial for Morguard, said this will create opportunities at some older buildings, opportunities that have come right out of the blue.
“They’ll have to stay in the existing inventories and the inventories will have to shift around to make them blocks. I think there will be movements . . . I think there will be some significant expressions of interest,” he said.
Owners of older buildings, it was feared, might face significant challenges competing for such leases. Swan said Morguard has discovered the opposite, though it will take significant investments by owners and managers.
Morguard is the largest owner of government-leased buildings in Ottawa and is heavily involved in the modernization program.
“Between 112 Kent, 320 Queen, Jean Edmonds on Slater and Laurier, I did the math and it’s between 500,000 and 750,000 square feet I’ve been involved in the process of converting,” Swan said. “To my surprise, what we found is some of the older buildings are built with a great deal of infrastructure.”
“When you build a new building, obviously when you have to heat or cool air it requires more energy. So they try to minimize that, whereas these buildings which were built in the late ’60s or ’70s have ventilation ducts the size of (eight-lane highway) the Queensway.
“So you can bring in more fresh air, which allows more people and you can also have more people on the floor because there’s more washrooms, there’s more elevators.
“Older buildings seem to work well with this densification, whereas some buildings that were built to a minimal standard, saving money by not putting in the infrastructure, not putting in the (extra) elevators, some of them may not be able to accommodate increased densification on the floors. That was a kind of eye-opening thing to me seven or eight years ago when we started looking into this.”
Reposition assets to fit needs
All the panelists agreed major expansions in the government’s overall space requirements are unlikely.
However, they do anticipate a significant acceleration of department space shuffles into modernized facilities, or at least into “swing space” as government-owned properties are upgraded.
“When this first came out, there wasn’t a lot of funding at the client department levels. That’s changing going forward,” said Zanon. “Treasury Board is opening up the purse strings giving the client department more money to do these types of GC workplace environments.”
Smith said smart property owner/managers will position themselves to take advantage.
“The opportunity with the feds when they are not acquiring space is the 18 million square feet that they own in our market that doesn’t really meet their leasing standards,” he concluded. “That they have to spend money on, and the opportunity for owners and developers in the room are to service those needs from Public Works.”