Speaking to almost 500 commercial real estate developers, investors and brokers in Ottawa, Claude Seguin said the federal government wants to increase its suburban presence.
“We want to have access to cheaper space,” said Mr. Seguin, who is the director general of portfolio management in Public Works’s real property branch.
The incredibly low downtown vacancy rates in recent years have meant the government is paying a premium over suburban space, he later added.
While Mr. Seguin said the vacated space will consist of both leased and Crown-owned accommodations, one of the city’s leading industry experts predicted it will mostly be the latter.
“The reduction will come from space (the government) owns, rather than the competitive market,” said Nathan Smith, a senior vice-president at brokerage firm Cushman & Wakefield Ottawa, in a separate panel discussion at the Ottawa Real Estate Forum.
In recent years, several local observers have noted the government needs to renovate many of its aging buildings. One example is L’Esplanade Laurier, which the federal government purchased this summer after leasing it for 35 years. The two 22-storey towers contain almost one million square feet.
But private landlords in the core will still be affected even if the space being vacated by Public Works is primarily Crown-owned, said one broker.
In an interview, CresaPartners managing principal Darren Fleming said downtown absorption levels are likely to be flat or negative in the medium term.
Bureaucrats relocated during renovations are likely headed out of the core and to the suburbs. When the retrofits are complete and buildings are once again ready to be occupied, it means the government can turn to Crown-owned assets, rather than privately owned buildings, to meet future space requirements, he said.
“The taps have been turned off,” said Mr. Fleming.
A reduced federal presence in the core could also have a spill-over effect on private-sector demand from companies that do business with the government. For example, there are dozens of consulting firms who need to be within walking distance of DND’s downtown headquarters to fulfill their contracts, said Mr. Fleming.
“If DND picks up and moves to Kanata, it is very likely they will as well,” he said.
The downtown office market is already showing signs of softening as private-sector demand remains weak and landlords market sizeable pockets of space, notably in the Sun Life Building and Place Bell, without a potential government tenancy to backfill the space.
Similarly, there are questions around who will fill the two downtown buildings currently occupied by Export Development Canada when the Crown corporation moves into its new headquarters if Public Works isn’t interested.
Mr. Fleming said there is already downward pressure on asking rents and forecasts rates could drop by $2 a square foot over the next year. He adds the class B market will be under the most pressure, given the strong federal presence in that segment and that most of the buildings likely vacated for refurbishment will be older, class B-type properties.
Greater availability in the class B market will also put pressure on the more expensive class A buildings, he added.
But the biggest federal move is expected to be to the massive Nortel campus on Carling Avenue. The 2.35-million-square foot complex contains considerable lab space as well as 1.7 million square feet of office area and was officially put up for sale this spring.
For years, observers have predicted the federal government would eventually occupy the space, with their only question being whether Public Works would purchase the campus, lease it or enter into a lease-purchase agreement, similar to the deal with Minto that’s seeing the RCMP headquarters move into the former JDSU campus.
Mr. Seguin confirmed the government is interested in owning the property outright.
“We have been engaged in the bidding process but at this point in time it would be premature to speak on the outcome. There is no agreement in place and I have no further comment,” he said.
Rumours that Public Works has the Nortel campus under contract were circulating at last week’s real estate forum. A media report published on the weekend cited unnamed government sources as saying Public Works will announce the $150-million purchase as early as this week to consolidate DND operations.
If so, attention will quickly turn to what will happen to the building’s current tenants.
Three purchasers of Nortel’s business units – Ericsson, Avaya and Ciena – reportedly occupy three of the 10 laboratories on the campus with fewer than 4,000 employees.
In a U.S. Securities and Exchange Commission filing, Ciena says it signed a 10-year lease for 265,000 square feet in Lab 10 at $7.2 million annually, including both base rent and operating expenses.
A new owner cannot terminate Ciena’s lease until September 2012, at the earliest. After that, the landlord can terminate the agreement by giving 30 months notice and paying it US$33.5 million, the filing states.
Speaking at last week’s forum, CB Richard Ellis vice-president Jim Shotton predicted those buyers of Nortel’s business units will soon be in the market.
“I expect those companies to be out there looking for space,” he said.
If they stay in the west end, where many high-tech companies are concentrated, it could be a significant boost for the strengthening Kanata market or lead to new build-to-suit opportunities for developers.
Back in the public sector, Public Works’s Mr. Seguin said the government will require 3.14 million square feet of office space in the national capital region between 2011 and 2013. The bulk – 1.36 million square feet – is needed to replace existing leases, while another 1.02 million square feet is required to replace Crown-owned assets.
A further 760,000 square feet is needed for new programs and priorities.
Mr. Seguin said Public Works will publish a request for 323,000 square feet of space within the next 12 months. The boundaries have yet to be determined, he added.
Additionally, there will be multiple tenders, ranging between 3,000 and 60,000 square feet and totalling 522,000 square feet, released over the next 12 to 18 months.
Mr. Seguin said his department plans to move away from releasing generic requests-for-information solicitations for office space in favour of a new dedicated web site.
Additionally, it plans on using triple-net leases for longer agreements of 15 years or more. Under a triple-net lease, the tenant is responsible for paying taxes, building insurance and maintenance costs on top of the rent.
Mr. Seguin said he’d also like to expand the government’s lease-brokerage services model. Earlier this year, Public Works contracting out a portion of its leasing duties to brokerage firm CB Richard Ellis as part of two-year pilot project.
