Before 1990, Kanata was a sleepy little suburban office market of less than two million square feet - less than half of what it would eventually become.
Most of the sector comprised of companies like Digital, Mitel and Newbridge, with their somewhat eccentric neighbour Bell Northern Research down the road in Bells Corners, who would eventually evolve into the industry giant Nortel.
Through the first half of the 1990s, nothing new was built in Kanata. Our country was in recession and many owners of commercial real estate were fighting hard to avoid losing their shirts. It wasn’t until later in the decade that telecom companies started their run-up - Mitel, Nortel, and Newbridge all expanded, growing the Kanata office market by about 500,000 square feet, according to Altus Insite.
Enter the 21st century. The tech race was off and running, and in 2000 the Kanata market grew by about 600,000 square feet, or the equivalent of one whole World Exchange Plaza. But we were just getting started.
In 2001, Kanata grew to a whopping 4.6 million square feet, equivalent to a growth spurt of about 1.4 million square feet in one year.
But good times never last. We all watched as the deck of cards collapsed and boom became bust, but what happened to the area’s real estate? It’s still there, of course, and is the one sore spot in an otherwise rock-solid area real estate sector.
Since 2002 the Kanata market has been described as weak, recovering, or in transition by owners and managers who, for the most part, were unaffected by their anchor tenants downsizing.
Meanwhile, vacancy rates soared to 30 per cent, about two-thirds of which were for sublease.
In 2000, aside from the big boys such as Nortel, Alcatel and JDS Uniphase - whose office presence exploded across the city - companies such as Nokia, Ceyba, PMC-Sierra, Marconi and Spirent had acquired large, class-A buildings built in Kanata they were fated never to occupy, in whole or in part. They were faced with a long ride on a 10-year lease.
We saw a brief respite in 2005 and 2006, when the Canadian dollar dipped and several large call centres moved into the market to eat up some space. But this happy ending wasn’t to be. When the dollar spiked and the call centres left, this time most of the manufactures left with them - Solectron, Alcatel and Nortel all closed their major manufacturing operations, leaving more big vacancies.
But other companies, reluctant to write that big cheque to walk away from their lease, have sublet their space. Much of that space is only now preparing to come back into the market as direct vacancy in the hands of the building owners. Spirent, PMC-Sierra, Nokia and others all signed 10-year leases and moved into beautiful buildings in the latter half of 2000 and 2001.
All three have sublet most or all of the big space they leased during the boom for a fraction of the rent they continue to pay to the head landlord.
But the light at the end of the tunnel is approaching for them - these leases will soon be up.
I’m sure their CFOs are anxious to hand the keys back to their building owners, and stop paying rent for space they don’t need.
That’s good news for the companies, but bad news for Kanata’s office market.
This is how we enter 2010 in Kanata. Fully half of the market came out of the ground in 2000 and 2001, and those head leases are rolling.
For years, market rates have stayed very low, because in most cases a for-profit building owner has competed with a cash-strapped tech firm subleasing space for next to nothing. The deals that did get done in direct space have generally been short-term, low-cash deals in which the landlords were happy to sign in hopes that the market would soon recover.
There are many questions about what will happen next.
The federal government, who got everyone excited by leasing its first space in Kanata, has run into roadblocks with departments that don’t want to move far to the west. Ex-Nortel employees that now work for Ciena and Ericsson appear to be staying in the Nortel campus for at least the next three to five years, or longer in Ciena’s case.
Is another shoe going to drop in that market? I don’t think so.
There is some (very) slow growth happening, and in a few years I expect the market will begin to tighten again and rental rates will begin rising.
But unless the feds buy the Nortel campus and kicks everyone out, it won’t be next year.
Darren Fleming is managing principal and broker of record for CresaPartners.
