The Ottawa office market might be a beta, or secondary, market in size but it was an alpha in investment activity and leasing during the final quarter of 2021.
Three major property transactions. Two new buildings delivered. Over 566,000 square feet of net absorption and a decline in the overall vacancy rate to 8.6 per cent – one of the lowest in North America. These figures, contained in the Q4 2021 CBRE Ottawa office report, would look good in almost any city in North America.
“In general what we are seeing is that the Ottawa market is more attractive, it’s offering attractive value to investors, moreso than Toronto and Montreal,” said Louis Karam, the managing director of CBRE’s Ottawa office, in an interview with RENX. “So that, I think, is helping on that front. We’ve definitely seen a lot of activity in 2021 and we are expecting it to continue in 2022.”
With an office inventory of about 41.5 million square feet, a large portion occupied by the federal government and a growing slice home to a significant tech sector, the city has long been seen as a relatively stable investment. Karam said that remains true, but there are other factors at play, too.
Major Ottawa office tower sales
CBRE’s senior vice-president Nico Zentil has been involved in several of the largest transactions in the city during the past year. He’s also had a front-row seat as most of the city’s largest office properties have undergone ownership changes in the past five years – including the 1.2-million-square-foot Place de Ville in November for $350 million.
“If you took a five-year period, and you look at the change of ownership in downtown towers, that’s been the most significant to me. We’ve had a huge swing in recycling of real estate in downtown Ottawa in the past five to six years,” Zentil observed. “It’s the natural recycling of real estate.”
“If you look at Minto (Place), Constitution (Square), Place de Ville, Sun Life, World Exchange, the five biggest towers, complexes in the city, those have all changed hands over the past five years. So we are likely not going to see that repeat itself for the next five years certainly, because you’ve got some length of ownership that’s going to kick in there.”
Former owners exit, new investors arrive
Some sold near the end of a fairly stagnant period for Ottawa office, but more recently there are new reasons for the exits.
“Certain groups that are no longer here deployed real estate strategies a decade ago, 10 or 15 years, and the intent was to execute on those and they executed on those very nicely,” Zentil said. “A lot of groups in that context are redeploying internationally, they are redeploying it in more concentrated positions In certain (other) centres.
“The big thing for us is that we’ve had the capital in behind to backfill.”
Crown and its investment partners, for example, have acquired 2.7 million square feet of space in Ottawa during the past few years. That includes the two-building, class-A 3755 Riverside Rd. office complex formerly owned by IBM, which it bought for $49 million in December on a sale-leaseback.
These acquisitions, along with the purchase of two Bank Street office buildings at Lansdowne Park by BTB REIT, pushed Ottawa’s office investment to its second-best quarter, an estimated $502 million.
More is coming. Zentil said up to four significant properties could change hands during Q1 this year. While he can’t release any details, he said there is plenty of investor interest in the National Capital Region.
“There is conviction in the space. There are people who have taken a very long view on office,” he said. “2021 was a big year volume-wise . . . we saw a lot of trades. And I think 2022 has the potential to be another (big year).
“We haven’t been as active at the start of a year, ever, I don’t think. That is telling, I think. The year is starting off with a lot of froth.”
Two new buildings, new leases
That “froth” is carrying over into other segments of the CRE market. Two significant office properties were delivered in Q4, which accounted for a large portion of the new leasing in CBRE’s report.
“It you peel that down a little bit, a lot of this is due mainly to the delivery of new supply of space that was already pre-leased,” Karam explained. “Zibi, for example, they have 170,000 square feet delivered in Q4 that is 90 per cent occupied by the feds.
“If I look at Kanata there was 150,000 square feet delivered for (tech firm) Kinaxis, which is fully occupied by Kinaxis.”
Zibi is a multi-billion-dollar development along the Ottawa River, straddling Ottawa and Gatineau, being developed by a Dream consortium. Three other office properties are at varying stages of development at Zibi, comprising about 210,000 square feet of additional space.
That space was announced prior to the pandemic, but Karam said there is still leasing momentum in the city.
Another example is that about 25 per cent of the 300,000 square feet of sublet space put onto the market by e-commerce darling Shopify early in the pandemic was leased in 2021.
“If you look at that new supply and you look at some big transactions that took place in the past few months, we are definitely seeing a decrease in the vacancy rate.”
Tech firms expanding office space
And despite early fears tech firms would dump office space en masse and move to largely work-from-home models, that hasn’t happened. The sector is leading the charge in Ottawa.
“What impressed me as I came into Ottawa was the tech sector,” said Karam, who arrived in the city about six months ago. “Kanata (in Ottawa’s West End) has been very resilient, helping with the diversification of tenants across the city and it’s booming.
“We strongly believe the recovery from this pandemic is going to be led by the tech sector and I think that’s what is helping us here in Ottawa.”
Both Karam and Zentil remain bullish on the city and the sector for many of the same reasons Ottawa has always been a part of many investors’ portfolios.
“Ottawa has been a really good hedge for (investors) where they can get relative value, a little bit more return sprinkled on the cupcake, so to speak. Overall it helps equalize things,” Zentil said.
“When the rest of the country is going nuts in terms of pricing acceleration, Ottawa helps to bring things back to ground level. On the flip side when the country is not doing so well, Ottawa always tends to be that equalizer market that helps to elevate things.
“So it’s a really good city in terms of geographic diversification for a portfolio manager.”