Ottawa’s office market faces a challenge on a scale few other cities have experienced, as the National Capital Region braces for the impact of federal government plans to reduce its real estate footprint 50 per cent during the coming decade.

In Ottawa and the neighbouring city of Gatineau, that could mean a return of 11 million square feet, or more, of office space to the market within the next 10 years. The subject was a major undercurrent at this week’s Ottawa Real Estate Forum at the downtown Shaw Centre.

While many speakers focused on the positive – the opportunity for the city to redefine itself and its downtown core – the sense of unease was palpable.

“The challenge is unprecedented, but we know it is coming and we have an opportunity to prepare for it,” Ottawa mayor Mark Sutcliffe said during his question-and-answer session.

Ottawa’s office market comprises 44 million square feet of space, according to Colliers’ Q3 2024 report. That space is leased roughly 50/50 between government and private-sector tenants.

In the downtown, Ottawa has almost 18 million square feet of office space, much of it around the Parliamentary Precinct which surrounds Parliament Hill.

Most federal office buildings "are not full"

Most of those buildings “are not full. They have not been full for many years,” according to Jeremie Emond, the director general of real property disposals for the PSPC, the federal agency tasked with carrying out the downsizing. 

Dispositions will include Crown-owned properties, and moving out of privately owned leased properties when current agreements end.

While the city’s office market as a whole must prepare for this downsizing, the biggest concern is for the core, which Colliers reports has a vacancy of 11.7 per cent and an availability of 12.9 per cent. Citywide vacancy is 11.5 per cent (availability 12.9 per cent) as it has slowly begun to recover from COVID and the work-from-home trend, which has been very pronounced within the public service.   

“Ottawa is still lagging behind the rest of North America as far as the return-to-office goes, but since September at least we’ve picked up,” said Michael Swan, assistant vice-president, office-industrial, property management and leasing at Morguard, which holds about four million square feet of space in the city.

“There has been a very significant increase in traffic downtown. It’s great to see.”

The feds issued a four-day-per-week return-to-office mandate for most employees as of September, but enforcement has been inconsistent.

Corrine Dorazio, vice-president of office leasing at Dream, which owns a new midrise office building on its 34-acre downtown Zibi development site, said occupancy remains low. The feds lease almost 160,000 square feet of the 185,000-square-foot building.

“On average I’d say that the occupancy is at about 30 per cent,” she said, noting most employees seem to be back about three days per week.

To create a more dynamic atmosphere for business, that has to change.

“This is a government-occupier market. Our federal government has got to lead really by example,” she said.

The scope of the office challenge

The impact of work-from-home on downtown businesses, however, could be a portent of things to come if the feds follow through on the full downsizing mandate. With over four million square feet currently vacant and up to 11 million more to come, that’s 15 million square feet to fill or repurpose. Even in its best years, Ottawa has not seen 1.5 million square feet of absorption annually. 

Today’s overall investment climate is challenging - while some companies such as Montreal-based Groupe Mach and local investors have been buying in Ottawa, that is not indicative of the wider commercial real estate industry.

“Many institutional investors are divesting of office assets in Ottawa, and in Canada,” Emily Hanna, managing partner, investments, at Crown Realty Partners, said.

Her Toronto-based firm owns about three million square feet of space in the city.

“So in the competition of who is going to invest in Ottawa, and Canada, there has been a significant shift. We are seeing a shift from institutional into private capital . . . and in general institutional investors are also shifting away from real estate, period, so the fundraising environment is not phenomenal on the institutional side. 

“And therein lies the opportunity for private capital to step in and take a place in the big opportunity that you’ve got here.”

However, no longer having the government to backstop Ottawa’s office market could create a chill among some potential investors.

“The historic stability that we’ve had in Ottawa is because of a clear and strong government presence in commercial real estate and that is a massive change right now in the market. So that allure that Ottawa has had on an institutional scale in attracting other capital is shifting.”

Will Ottawa remain a stable investment market?

Therein lies the crux of the matter, she said.

“It’s not just about the stability (any more), it has to be about something else.”

Converting office space might solve a portion of the problem, but it’s just one element of what must be a larger plan. About a dozen office buildings have been deemed suitable for conversion, but even if all were to become residential properties, Emond said much more is needed.

“Housing is very important but housing is not the only thing that makes a downtown. You need to build a community, not a dormitory,” he said. Conversions must be economically viable: “Understanding that the capital and the investor needs to make a profit to continue operating, and we are totally in agreement with that concept, it takes a little bit of brain effort to move from an investor to a community builder.”

Sutcliffe and others noted the city is already moving to address the issue. 

New Ottawa Senators owner Michael Andlauer has struck a preliminary deal for land at the edge of downtown for a new arena. Global entertainment promoter Live Nation has a deal to create a downtown concert venue along Rideau Street, Dream’s Zibi project is adding new residents, a couple of office-to-residential conversions are underway, and a new flagship downtown library is being built.

But that’s only the beginning.

“I appreciated the mayor’s comments on the immense challenges facing the city. We are optimists as investors, as developers and citybuilders here,” Hanna said in summarizing her thoughts. “Maybe I just moved more on the dark side, but the day was overly optimistic from my perspective. 

“I think he (Sutcliffe) had some very sobering comments and yet again on the optimism side, this does create phenomenal opportunities.

“Of course, we are a cyclical industry, so this too will pass.”