Commercial real estate market still sluggish: report

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Ottawa’s commercial real estate market continued its slump in the first nine months of 2015, reflecting skittishness over the economy and the federal election, according to a new report from Colliers International.

A total of 60 properties in the industrial, multi-family, office and retail categories changed hands from January to September, a 32 per cent drop from the 88 transactions recorded in the same period in 2014.

The total value of commercial deals plummeted even further year-over-year, falling from nearly $610 million in 2014 to just over $350 million in the first three quarters of this year – a whopping 48 per cent decline.

“Much of this limited sales activity could be attributed to the uncertainty that surrounded the recent federal election, which held a great deal of influence over the future of Canada’s economy for the coming years,” said the report from Oliver Tighe, the managing director of Colliers’ valuation & advisory branch in Ottawa. “Year-to-date transaction volume has significantly decreased in all asset classes except for retail.”

The multi-family and office classes showed the biggest declines in volume, according to Colliers.

Just 16 properties in the multi-family category were sold from January to September, half the number that changed hands the year before, while the average price per door dipped 10 per cent to just under $127,000.

But the report also noted that the sector featured the largest and “most notable” transaction of the third quarter, Homestead Land Holdings’ $34-million purchase of a 201-unit apartment complex formerly owned by Minto at 2750 Carousel Cres.

“That transaction shows there continues to be strong demand for good-quality, well-located apartment buildings in Ottawa,” said Mr. Tighe, adding the building has a particularly low cap rate of about four per cent.

He said building new rental units remains “challenging” for developers, so some are opting to buy existing properties instead.

“The economics (of building) are tough, the profit margins are really thin,” Mr. Tighe said. “I think a lot of owners feel it’s just easier to purchase an existing building and renovate it and increase rent.”

Overall, Colliers predicts a fairly bright future for the category.

“The multi-family market in Ottawa continues to be one of the top-performing asset classes and the least volatile,” Mr. Tighe said in the report. “Due to the strength of this asset class in the Ottawa area, many developers are actively pursuing purpose-built rental building developments in order to sustain longer-term cash flow.”

There were only 10 transactions in the office category, a 47 per cent drop from the 19 properties that were dealt in the first nine months of 2014.

On the plus side, the report said, the average price per square foot rose slightly to $198 in 2015 from $185 last year.

“The office market continues to be the most volatile of all asset classes throughout the Ottawa area,” Mr. Tighe wrote. “Vacancy across the city continues to be high due to the government’s downsizing and relocation strategies.”

Still, he said things will turn around eventually if the Liberals loosen the federal pursestrings as expected.

“They’re going to be spending money and inevitably some of that money is going to get spent in Ottawa,” he said in an interview with OBJ. “Inevitably, I think the public service will increase and they will start to occupy more office space. I think (the sector) will stabilize. As to when, it really is hard to say.”

The news was more encouraging in the retail category, which held steady at 17 transactions through three quarters, the same number as the year before. Those deals totalled $93.2 million, a 10 per cent jump from the previous year’s tally, although the average price per square foot fell to $281 from $334.

Among the major retail transactions in the third quarter were Loblaw Properties’ $16.2-million deal to buy the former Hartman’s Your Independent Grocer building on Bank Street and Golpro Holdings’ $22-million purchase of Mercury Court, a landmark ByWard Market retail and office complex at the corner of George and Dalhousie streets, from Toth Equity.

“Mercury Court is a great example of the demand (for retail properties) you see in Ottawa,” Mr. Tighe said. “The ByWard Market has always been sought-after.”

The retail sector will continue to perform well in 2016, he predicted.

“I think with the challenges in leasing retail presently, some owners are saying we’d rather dispose of our asset than continue to own it with the challenges of leasing,” he said. “One man’s problem is another man’s opportunity.”

The industrial class saw the sharpest decline in overall value of transactions, with 17 deals totalling less than $30 million, down from 20 sales worth a combined $81.8 million in 2014.

Mr. Tighe blamed a lack of quality product, noting the small amount of available serviced land ready for development means existing owners of industrial properties are reluctant to part with their holdings.

“The owners who own don’t want to sell,” he said. “There’s strong demand (but) limited supply.”

On the whole, Mr. Tighe is forecasting an upswing in sales activity heading into the new year.

“I couldn’t be more optimistic,” he said. “I think confidence (in the commercial sector) has increased. I’d like to believe we’ll see more transactions than we did in the previous Q4.”