Sorting out opaque office market moves in the capital

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The year 2013 may be remembered as the year in which all the things that Public Works had said would start happening did indeed start happening.

(Stock image)

By John Seymour

Since the federal government’s 2012 budget, which clamped down on departmental spending and eliminated 19,200 public service jobs, Ottawa’s real estate industry has been waiting to see what impact the austerity measures would have on the government’s office portfolio.

Now, Public Works’s program appears to be underway. So what evidence is there in the market that the federal government’s strategy is in action?

Let’s start with what bureaucrats said would happen. The most visible part of the strategy is growth in supply.

The government took delivery of four newly constructed buildings – 455 de la Carriere Blvd., 22 Eddy St. and 30 Victoria St. in Gatineau, as well as 395 Terminal Ave. near the Ottawa Train Yards – giving it 1,535,000 additional square feet to occupy.

Looking ahead, Public Works will take delivery of 90 Elgin St. (645,000 square feet) in late 2014. And although it is not part of Public Works’s domain, Communications Security Establishment Canada is set to occupy 775,000 square feet at its new east-end campus by the end of the year.

Finally, Public Works received Treasury Board approval in December to consolidate the Department of National Defence’s operations in the former Nortel Campus, giving it another 2,350,000 square feet.

By the numbers

At the same time, budget reductions have constricted demand for space.

Our best guess is that Public Works leases or has lease-purchase arrangements for about 20 million square feet in the National Capital Region. Locally, the Crown also owns another 14 million square feet of office space, giving the federal government an overall office inventory of roughly 34 million square feet.

The spending restraint within the 2012 budget could translate into a space reduction of between 1.7 million and 3.4 million square feet. Meanwhile, an initiative known as Workplace 2.0 that’s shrinking the average amount of space allocated to each worker could translate into a further reduction of 7.5 million square feet.

Creating holes

The second part of the strategy is dealing with the “Swiss cheese effect.” In its 2012 budget, the federal government told its departments and agencies to reduce spending by five to 10 per cent. To meet that goal, managers eliminated programs and people. As a result, federal tenants that traditionally relied on Public Works to find them office space are now turning to the government’s real estate officials to shed space that’s surplus to their needs.

“Swiss cheese” is how the assistant deputy minister of Public Works’s real property branch, Pierre-Marc Mongeau, described the effect of these moves in his October 2013 talk at the Ottawa Real Estate Forum.

He said that as departments identify cuts, they will require less space and will leave gaps in certain buildings. In response, Public Works will try to fill some of those gaps by consolidating accommodations, focusing first on the buildings that it owns, and then properties in which it holds long-term leases.

This is where it gets tricky. First, Public Works only needs to provide notice if it is planning to renew a lease. It doesn’t need to disclose when it is not renewing. Secondly, Public Works is usually working on accommodations that it will only occupy two or three years later, which means it is currently working towards its needs in 2016-17.

This means that some building owners and managers are facing a challenge, as they may be under the impression that their space will remain occupied and thus fail to compete when the government asks for office space bids as part of its formal search for accommodation options.

This is where the market gets opaque. Public Works may inform landlords that it will not be exercising its right to renew its lease for some accommodations with approximately two years left on its term. Public Works will not say whom it has informed as the department feels it is up to the owner to determine when it is appropriate to reveal that information.

The struggle for market watchers is to keep up with the news, disseminated one landlord at a time, of leases expiring in the next couple of years.

John Seymour is vice-president of business development at Colonnade Development. He provides commentary for market transactions and trends on Twitter @JESeymourOttawa.

Organizations: Public Works, Communications Security Establishment Canada, Treasury Board Department of National Defence Ottawa Real Estate Forum Colonnade Development

Geographic location: Ottawa, Victoria, Gatineau National Capital Region

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Recent comments

  • Jayme
    March 14, 2014 - 17:18

    James The other side if Quebec does leave all federal jobs would likely be moved to Ottawa thats about 50,000-60,000 jobs so we could go from having to much office space to having not enough.

  • James McNeil
    February 27, 2014 - 15:11

    Great article John! As you says “by the numbers”. Of the 8,124,850 square feet of new buildings and relocations (Nortel for DND and JDS for RCMP) the Feds have occupied about approximately 2,351,068 square feet to date. This means that 29% of this part of the accommodations strategy has been implemented with another 5,773,782 square feet still to be populated between now and 2018. In the 2012 budget Workplace 2.0 was approved, this among other cost cutting measures mandates reductions of space per employee of 21.75 square feet. According to CMHC the federal service in Ottawa is approximately 110,000 people. 21.75 square feet multiplied 110,000 is a reduction of 2,392,500 square feet. Add to this the reduce size of the workforce by somewhere between 14,000 and 19,000 (depending on where you read it) puts an addition pressure of between 2,702,000 (14000 x 193sf) and 3,667,000 square feet to Ottawa’s stressed Office market. Let’s put this into a market perspective, orders of magnitude of these charges are in the 13,000,000 square foot range. The size of the office market in the national capital region (both sides of the river) is about 60,000,000 square feet. What this means is that over 22% of the entire office market could be impacted. These impacts don’t take into account space reductions by the private sector brought on by other austerity measures being implemented by the Feds. Ottawa’s biggest concern should be the down town where a full 72% of the office space is leased or owned by the Federal Government. Clearly this is a massive shift; I just hope the City is taking this into account in their transportation master plan.