The ongoing pandemic, a quest to green its real estate footprint and a portfolio of buildings nearing the end of their useful lifespans will lead to a major transformation of the federal government’s real estate footprint during the next couple of decades.
That was the message from Stéphan Dery, the assistant deputy minister, real property services, for Public Services and Procurement Canada during his annual update on the government’s real estate plans at the virtual Ottawa Real Estate Forum this week.
While many of these changes had already started well before the pandemic, Dery said the effects of COVID-19 have accelerated some of the transformations, and the government’s owned-building portfolio isn’t getting any younger. Decisions on its future are becoming more pressing.
The feds do own a significant portion of the 75 million square feet of space they occupy. Of that portfolio, about 38 million square feet is in Ottawa, Gatineau and the National Capital Region (NCR), and 18 million square feet is leased from private owners.
Dery and PSPC work with 102 departments and agencies which employ about 240,000 people, just over half of them in the NCR.
Any shift in strategy will have wide-reaching implications for commercial real estate owners and operators, from those now leasing space to the feds, to companies wanting to sign government agencies as future tenants, and others hoping to buy aging assets for redevelopments.
“I think what you will see in the next few years is the Government of Canada disposing of large, old high-GHG-emission assets and replacing those assets by either new space that is leased, that is carbon neutral, or old space that is modernized and carbon neutral,” Dery told the CRE executives attending the online interview conducted by Nathan Smith, senior vice-president at the Cushman & Wakefield Ottawa office.
L’Esplanade Laurier could be sold
He offered the example of L’Esplanade Laurier, a complex including two 23-storey office towers connected by a podium, with three levels of underground parking in downtown Ottawa.
“I can see L’Esplanade Laurier in the next four, five or six years being on the market for the private sector either to redevelop it into apartments/condominiums, or redevelop it for office space, a hotel, whatever the private sector and the city will need at the time,” Dery said.
“These large assets that are at the end of their useful lives, we are going to be looking to dispose of them.”
The message was clear for firms looking to do business with the government, which has committed to reducing its greenhouse gas emissions by a minimum of 40 per cent by 2030. Real estate will be a major contributor.
“A lot of our inventory is old . . . it’s significant GHG emissions. So we are really looking for the next inventory, where we are going, to make these buildings, either leased or old, carbon neutral. It’s quite important to us,” Dery said.
“In 2030, 75 per cent of our lease(s) will have to be carbon neutral.”
As for how much space the government will occupy, Dery said current projections are to continue down the path to cut 30 per cent of its footprint.
Feds remain committed to smaller footprint
“Our portfolio plan says that over the next 25 years, we are thinking about reducing our footprint by 30 per cent or more depending on the outcome of COVID. It might be accelerated, but it’s not something that is going to be done overnight.”
Smith noted, however, if the government does shed aging real estate in favour of leasing newer, more environmentally friendly space, that could actually offer an opportunity for the CRE sector.
“When we talk about a 30 per cent reduction in your space over a 25-year horizon, people in the room would start to get nervous. Is public works going to significantly downsize their lease portfolio?” Smith asked.
“I would say it’s probably an opportunity for growth in your lease portfolio as you exit some of these Crown-owned assets.”
Dery left all options open, but reinforced his earlier comments about greening the portfolio. He wanted the message to be “quite clear” – this is where the opportunity will be.
“I know that really today, none of our lease would meet that (GHG) criteria in Gatineau, Ottawa and (the NCR). So we have an opportunity here.
“If you are a landlord, an owner, an investor, and you want to keep leasing space to the Government of Canada, just think about that. Seventy-five per cent of new leases or renewals in 2030 will have to be carbon neutral.”
The process has already started, with the disposal of several aging federal buildings in the NCR. In 2019, it was announced the feds will lease 158,000 square feet at a new eight-storey office building being constructed at the carbon-neutral Zibi development straddling Ottawa and Gatineau.
The government is also looking to develop a 1.6-million-square-foot office campus on land it owns at 599 Tremblay Rd. in East Ottawa, working with a developer on a land-lease basis.
Return to office and potential vacancy
Dery touched on a number of other points during the wide-ranging, half-hour presentation.
On current lease renewals, he said the government is looking at shorter time frames for properties it renews, but so far it has not made significant space reductions.
“We know that space may be used differently, but we’ll need space. So over the last 18 months, the COVID period, we have approximately renewed 100 leases, totalling 3.2 million square feet in the National Capital Region,” Dery said.
“If it’s going to reduce, it’s going to reduce over time. It’s not something that you turn on a dime.”
On return-to-office, he said government data shows pre-pandemic most public service offices had in-person occupancy of about 60 per cent capacity on a daily basis due to a combination of many factors – hybrid work schedules, staggered working times or shift work, travel, time off, illness, etc.
Current in-person staffing remains well below that level and he said he foresees permanent on-person staffing levels dropping by another 10 per cent or so.
“I could definitely see an increase in that with the work from home, or hybrid model equal to 10 per cent . . . easily 10 per cent.”
Smith put that into perspective, noting vacancy in Ottawa had declined to the six per cent range pre-COVID and is sitting around 10 per cent now with some reabsorption occurring.
“On a market basis, is that three or four per cent? Somewhere in that range, and that is really delivering two or three new buildings into the market at once and letting the market absorb that space,” Smith offered.
“I would suspect the market will be resilient and be able to absorb that vacancy that obviously is coming to us post-COVID.”
Government co-working model
Dery also envisioned the possibility of a government network of workspaces allowing remote workers to access facilities closer to where they live.
Modelled on the co-working office format, he said it could involve a number of departments sharing workspaces.
“You may have a building in a remote location but it doesn’t serve only one department . . . it serves all of the federal public service and it’s that kind of co-working space,” he explained. “We see a take-up on that and interest from multiple departments.
“I think it is going to work well with the hybrid (work schedules): you need to go to the office, there is an office not too far from your house and you reduce the GHG emissions.”