Doors wide open to downtown deals

David
David Sali
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The crowd at the opening of Morguard’s state-of-the-art Performance Court at 150 Elgin St. last month was all smiles – much like any prospective tenant looking to lease office space downtown in the best renter’s market in years.

Performance Court officially opened June 18

Morguard’s 21-storey tower, which includes 360,000 square feet of class-A space, is already 90 per cent leased, with high-profile tenants such as Shopify, CIBC and KPMG among those who have either already jumped ship from nearby buildings or are preparing to do so. 

That’s good news for Morguard and the occupants of one of the most talked-about new buildings to grace Ottawa’s skyline in years. But it’s not exactly reason to celebrate for most other landlords in the city’s downtown core, who are scrambling to fill empty floors in a rental market with vacancy rates higher than they’ve been in years.

“The days of the downtown Ottawa market being a landlord’s market are over, at least for the next several years,” says Bruce Wolfgram, a vice-president at Primecorp Commercial Realty.

“Tenants have an abundance of options.”

Indeed, the addition of Performance Court to the downtown office rental market has left a significant inventory of available space in nearby buildings. 

Neighbouring Place Bell at 160 Elgin will be looking to fill 50,000 square feet left vacant by KPMG, which moved into Performance Court in June. The Canada Council for the Arts, which is occupying five floors as the lead tenant of the new tower, left 80,000 empty square feet behind at Constitution Square at 360 Albert St. 

When CIBC moves into its new digs on the top three floors of Performance Court later this year, another 33,000 square feet at its old home in the Sun Life Financial Centre at 50 O’Connor St. will be up for grabs. Shopify, meanwhile, is vacating about 30,000 square feet of space at 126 York St. in the Byward Market later this summer.

Those tenants alone represent nearly 200,000 square feet of prime real estate being dumped on what was already a stagnant downtown market. Clearly, it’s a good time to be shopping for office space in the core.

“It is the strongest tenant’s market in the downtown core in the last 20 years,” says Darren Fleming, principal managing partner at Cresa Ottawa. “I haven’t seen a market like this in my whole career.”

The newest office vacancy numbers bear that out. In its latest report released last week, real estate brokerage firm Colliers International said the downtown office vacancy rate jumped to 9.5 per cent in the second quarter, up from 7.3 per cent in the same period a year earlier. The average asking net rent fell to $20.50 per square foot, a drop of nearly 10 per cent from the $22.50 at which it stood in the second quarter of 2013.

“The pendulum has kind of swung,” says Colliers market intelligence co-ordinator Frannie Heeney, one of the report’s authors. “If you’re looking to invest in space, if you’re looking to move around, this is a good time to be taking a look.”

Facing intense competition for tenants, many downtown landlords are offering sweeter incentives – including months of free rent and significant building upgrades – than they have in years.

“I don’t see any quick fix for the landlords who have vacant space,” Mr. Wolfgram says. “That’s why we are seeing landlords becoming much more aggressive in trying to secure the relatively few deals that are out there.”

So far, it hasn’t worked – at least not with much of the space vacated by tenants who moved into Performance Court. The second floor of Shopify’s York Street headquarters has been leased to a tenant yet to be publicly named, but large blocks of empty or soon-to-be-vacated real estate in other buildings remain on the market, in many cases at least 18 months after departing renters notified landlords they were leaving.

“Everybody knew that when you bring up a new building, you’re going to create some vacancy out in the market, but the hope is that within a reasonable period of time, it’ll get leased,” Mr. Fleming says. 

“(There is) steep, steep discounting going on to try and get the space leased, and it’s not leased yet. We’ve just passed what most people would consider a reasonable period of time to re-rent those properties. We’re now going on multiple years between tenancies where the space is vacant and burning a hole in the owner’s pocket. Now things are getting dire.” 

When Morguard first conceived the Performance Court project a decade ago, market conditions in Ottawa were very different, he says. Since then, the country has struggled to climb out of a recession and the federal government’s subsequent downsizing has taken a hefty toll on the local economy.

At the time Performance Court was given the green light, Mr. Fleming says, “the downtown core had a three per cent vacancy rate, rents were sky-high and the government still had a pretty healthy staffing level. Since then, the government has laid off 20,000 people.”

He doesn’t see the situation changing significantly for desperate property owners any time soon.

“I think we’re in the new norm,” he says. “I think this is the way Ottawa is.”

Others, however, take a somewhat rosier view. 

Dave Pridham, director of leasing for the Sun Life Financial Centre, says more potential tenants have been kicking the tires at the downtown tower in the past couple of months than earlier in the year, a sign there could be a bit of blue sky on the horizon.

“To me, the summer has been far better than the spring,” he says. “That’s usually not the case. It’s all very encouraging right now compared to, say, 90 days ago.” 

Mr. Pridham says he is hoping Shopify’s move to Elgin Street will be “the thin edge of the wedge” of technology firms choosing to set up shop downtown to cater to a younger workforce. A federal election in 2015 could lead the government to loosen its purse strings, he adds, giving an additional boost to the city’s sluggish economy.

“Hopefully, by 2016, we’re all singing a different tune,” he says.

Ms. Heeney notes Public Works recently issued a call to landlords for a potential 111,000 square feet of office space in the downtown core, with a lease period of 15 years beginning in 2017. Though the feds have yet to issue a request for proposal or a tender, the fact the government is even thinking about leasing more space downtown should give landlords reason for hope, she says.

“One big thing can happen – 100,000 square feet can be leased out by the government – and that can change everything,” she says. “I don’t think that it’s going to be doom and gloom forever.”

Michael Church, principal and managing director at Avison Young, who has been involved in the Ottawa real estate market for nearly three decades, says the pendulum will eventually swing back in landlords’ favour, just as it did after the recession in the early ’90s and the dot-bomb crash at the turn of the new century.

“Night follows day,” he says. “I’ve lived in Ottawa way too long and I’ve been in business way too long (to worry). It’s the rolling wave. We’re in a slight trough right now. We’ll come out of it.”

 

FACELIFT IN CITY’S CORE LONG OVERDUE, Brokers SAY

 

The glut of space in the downtown office rental market may have caused a headache for landlords, but it could be a blessing in disguise for aging properties in need of a makeover, local brokers say.

“When your building is full and you don’t really have to try very hard to rent your properties, you’re not really motivated as an owner to transform the properties. You’re not out there trying to change the image of the building,” says Darren Fleming, principal managing partner at Cresa Ottawa.

With downtown vacancy rates approaching double digits, that has changed, he says.

“You’ve got a lot of landlords going back and reinvesting into their properties. That, I think, is good. I’m excited to see the downtown core get a bit of a facelift on some buildings that probably needed it.”

The Sun Life Financial Centre at 99 Bank St. and 50 O’Connor St., for example, is set to undergo a multimillion-dollar renovation over the next couple of years. Completion is targeted for 2016, when the building will be 30 years old. 

Dave Pridham, the centre’s director of leasing, says the main atrium and the lobbies in both towers will get a “lighter and brighter” look, with other changes coming in spaces where one tenant occupies more than one floor. 

Montreal-based NEUF architects, which also helped design the new Performance Court at 150 Elgin St., is working with the building’s owners on several concepts, Mr. Pridham says. The final design will likely be unveiled early in the fall.

Meanwhile, the owners of Place Bell at 160 Elgin St., which opened in 1971, are rumoured to be considering a $35-million overhaul that will include a three-storey curved glass pavilion added to the main entrance as well as a new food court.

“The downtown core is a very competitive place right now,” Mr. Pridham says. “You have to (revamp properties) to keep up with the times.”

Michael Church, principal and managing director at Avison Young, agrees a lot of planned upgrades to downtown properties are long overdue, adding he thinks some buildings might be gutted or torn down entirely once major tenants such as the federal government decide to vacate them when their leases expire.

“A lot of the stuff that (the federal government is) currently in is, I would suggest, perhaps not long for the world in the grand scheme of things,” he says. 

“At some point, you’ve got to look at something and say, ‘You know, it’s time to take that down.’”

Organizations: CIBC, KPMG, Sun Life Financial Centre Darren Fleming Primecorp Commercial Realty Canada Council for the Arts Colliers International Michael Church Public Works

Geographic location: Ottawa, York Street, Elgin Street Montreal

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Recent comments

  • Jayme
    July 23, 2014 - 08:21

    Mr G The city does get a fair amount of cash from building permits so lets say the Sunlife and Place Bell do major renovations thats a ton of extra cash for the city.

  • Darren Fleming
    July 22, 2014 - 17:15

    Hi G. Bateman: Real Estate that doesn't lease will sell at a discount price and will typically be either fixed up and leased or perhaps re positioned. I wouldn't be surprised if we see some funky boutique hotels arise from some of the ashes here. But keep in mind, lower rents are good for the tenants who lease them. I know my business could use a break on the rent. What about yours?

  • Mr. G. Bateman
    July 21, 2014 - 17:10

    What will happen to the city revenues when these older buildings are vacated.It's all very well to crow about the need for revitalized older buildings but in the mean time the city has an ever expanding need for additional revenue to pay for new transportation, social costs and etc.