Of all the places in Canada where one would expect Federal Government cutbacks to impact office vacancy rates Ottawa is the first place that comes to mind.
The National Capital Region accounts for 53% of the office space occupied by the Federal Government across Canada and Government occupied office space takes up 63% of the entire office market in Ottawa and Gatineau combined.
While not denying that cutbacks will have some impact on the office sector Nathan Smith, Senior Vice President, Capital Markets with Cushman and Wakefield Ltd. in Ottawa does not expect Federal layoff’s to significantly impact the local market in the foreseeable future.
Speaking at the Ottawa Real Estate Forum, Smith says that ‘the real estate lag is too long’ relative to the 2014 time frame when the Federal Government intends to balance its budget and 2015 when it plans to generate a surplus.
Change in the Federal Government happens very slowly and the first step is to stop growth not to cut jobs according to Smith. The Feds spend about $1-billion on occupancy costs in the Ottawa area on an annual basis which Smith compared to the $50-billion that it has been spent on stimulus spending in recent years implying that greatest savings are to be found elsewhere.
The elephant in the room as Sandy McNair , President, of Altus InSite described the Federal Government presence in Ottawa has generally been growing and hasn’t seen a space reduction since the mid 1990’s.
Overall the Federal Government is moving toward purchasing property and the leasing component is shrinking said McNair. In spite of the a stated sustainability policy on the part of the Federal Government the Ottawa market is much less green than other major Canadian cities.
In contrast to Smith’s predictions McNair speculated about a significant shrinkage in the Ottawa office market occupied by the Federal Government. His calculations showed that as much as 10.5 million square feet out of the 40 million currently occupied by the Feds could become vacant in the next five years.
McNair’s prediction, presented at the Ottawa Real Estate Forum, may have been provocative in order to generate discussion but nevertheless was backed up with a credible analysis.
The vacated space was calculated based on four factors that McNair foresees impacting the Ottawa market.
1. Increased density in the space allocated per worker, following the private sector trend in this regard, McNair anticipates would generate a 20% per person reduction in square foot area and account for 900,000 square feet.
2. A lower headcount of about 3% due to a reduction in the Federal workforce would free up about 4.7 million square feet.
3. About 4.5 million square feet McNair attributes to backfilling of new space. As leases expire in the downtown, which is expected to peak in downtown Ottawa in 2013, people will be moved into new government buildings.
4. Increased efficiencies with relocations to Class A and A minus buildings would account for an additional 400,000 square feet of unoccupied space.
Building owners who have not upgraded their properties, and those with Class B property, can expect that the Government will not renew leases but Nathan Smith does not expect layoff’s to occur in great enough numbers to create vacant space. He anticipates a 5% cutback of people at the most, anymore he characterized as ‘unpopular’.
With the purchase of the Kanata campus of Nortel Networks by the Federal Government the office market in that part of Ottawa will be much more stable than than it the past. It is going to have an overall positive impact on the entire Kanata area concluded Smith.
All current information presented at the Real Estate Forum confirmed that Ottawa continues to be a slowly evolving and steady commercial real estate market that continues to attract investment because of its predictability. If there are going to be dramatic changes in the overall Ottawa office market due to Federal spending cuts or other issues there is little sign of it yet.