2018 lookahead: Tech migration driving ‘sea change’ in downtown office market

Changing commercial real estate landscape presents both challenges and opportunities for owners of lower-tier properties looking to entice new style of tenants
234 Laurier
Shopify made headlines in 2017 when it announced it was taking over much of the tower at 234 Laurier Ave. (Photo courtesy Gillin Engineering)

In a town where the federal government has been the dominant tenant in commercial real estate seemingly forever, Michael Church and his colleagues are starting to sense a subtle shift in the landscape.

The managing director at Avison Young’s Ottawa office and a broker in the capital for three decades, Church is as tapped in to the local real estate community as anyone. What he heard at last fall’s Ottawa Real Estate Forum – an event where federal government leasing strategies and requirements typically monopolize industry chatter – caused him to sit up and take notice.

“The focus was not on the feds,” he says. “It was all about technology, it was all about transportation. We spent a lot of time on major projects, (multi-residential developments), which was quite refreshing.”

Church and many of his fellow brokers say 2018 is shaping up to be a pivotal year, the start of a new era in which a growing number of established firms and young upstarts in the technology industry begin to put their stamp on the downtown market.

“I’m seeing a full-on shift,” says Shawn Hamilton, a senior vice-president at CBRE’s Ottawa office who has been part of the local real estate scene for more than 25 years. “It’s not away from government; we’re always going to be a government town. But our reliance is less on government, and there’s now room for other business cultures and other businesses to grow in our downtown, which is very exciting.”

Church calls it the “Shopify effect,” and for good reason. The e-commerce giant made headlines last spring when it leased 325,000 square feet of space in the former Export Development Canada building at 234 Laurier Ave. in anticipation of adding up to 2,500 employees over the next decade.

But a growing number of other firms, both new and well-established, have anchored themselves in Centretown and nearby neighbourhoods such as Little Italy, far from the traditional tech hub of Kanata North.

Among them is business dashboard developer Klipfolio, one of Ottawa’s hottest companies. The booming software enterprise – which made Deloitte’s list of Canada’s 50 fastest-growing companies in 2017 – plans to vacate its longtime headquarters on Gloucester Street for a state-of-the-art new 17,000-square-foot head office in the World Exchange Plaza early this year.

Tech newcomers such as online grain marketplace FarmLead and fitness tracking firm GymTrack have also chosen to make their homes downtown, close to where their predominantly 20-something workforces live and play.

“Downtown is starting to become a place to be for burgeoning tech companies”

“Downtown is starting to become a place to be for burgeoning tech companies, to the point now – and most of this is on the back of Shopify – technology is the biggest industry in our downtown core behind the federal government,” Hamilton says. “That will bring a culture shift to our downtown core.”

Far from adhering to the traditional model of staid office towers filled with a maze of cubicles, the new crop of tech firms tends to prefer wide-open work spaces and large meeting rooms that encourage employees to congregate and bounce ideas off each other – not to mention places where they can kick back and enjoy a stress-busting game of fussball or table hockey.

Veteran broker Bruce Wolfgram notes that even kitchens have gone from afterthoughts relegated to the back of an office to brightly lit beehives of activity in many workplaces.

“It’s no longer a cookie-cutter approach to how you organize an office,” says Wolfgram, principal at Proveras Commercial Realty, whose firm represents only tenants and counts several tech firms among its clients.

The rise of tech presents both challenges and opportunities for commercial landlords, brokers say.

Soaring vacancy rates

The federal government’s exodus from downtown class-A properties caused many landlords to woo new tenants with incentives such as free rent and subsidized fit-ups in order to fill the vacuum.

That’s driven downtown office vacancy rates in those buildings down to less than five per cent, while vacancy rates in Ottawa’s aging crop of class-B properties have spiked from close to zero a decade go to nearly 15 per cent today. The picture is even bleaker for class-C buildings, where nearly a quarter of all leasable downtown office space sits empty.

But owners of lower-tier buildings now have a chance to get some of that business back by targeting tech upstarts that want to be downtown where the action is but don’t have the budget to lease class-A space, experts say.

Class B- and C properties are also more likely to be in the hands of local owners who have more flexibility to completely redesign a space than landlords at top-tier addresses, who are often constrained by the policies of those buildings’ large corporate owners.

Many startups have “creative wishes to transform their space that might not fly in an A-class tower today,” Hamilton says. That’s opening the door to landlords in B and C-class buildings who are willing to reconfigure an office to suit a prospective tenant’s needs.

“I’m not going to say that the C-class market is going to go from a vacancy of the high twenties down to zero, but I’m seeing that there is the possibility for real demand in buildings we were wondering what we were going to do with two or three years ago,” he says.

“I think there need to be a couple of brave landlords who will step out and say, ‘We’re going to take this building and we’re going to be creative and retool it to appeal to the high-technology crowd.’”

Church agrees.

“What do people want? At the end of the day, it’s access to light, it’s good-quality air, it’s perhaps a change in design,” he says.

“It’s time for those landlords to say, ‘Look, I could be the next wave.’ There’s all manner of opportunities for those who (say), ‘You know, things are changing and now’s my time to change.’ You stay put at your peril.”

While tech firms are the leading contenders to fill the class-B and C vacuum, other organizations such as not-for-profits are also starting to rethink their office needs, brokers say.

For example, the Canadian Chamber of Commerce has just moved from Constitution Square, its home for the past decade, to a class-B building managed by Colonnade Bridgeport at 275 Slater St., lured by the carrots of cheaper rent and a no-cost makeover of the space.

“What’s happened is there’s a value proposition in these B-class buildings that was never there before,” says Alan Doak of Proveras, which represented the chamber in leasing negotiations.

“It’s not just technology companies that are thinking this way. We have clients in the legal industry that want to do things that are creative and modern. We’ve got large Crown corporations that we work with that are completely rethinking the way they want their working environment to be.”

It’s now up to landlords to get on board and start reimagining their properties to make them more appealing to tenants with changing tastes and demands, experts say.

“Part of the challenge is, as a government town, we don’t have a lot of experience with that,” Hamilton says. “So we need to retool ourselves as a real estate community to understand what that means. It’s more than just beanbag chairs and bring your dog to work.”

Although the move to Class-B and C properties has already begun, some brokers say it will really pick up steam in 2019, when the Department of National Defence has completely vacated the downtown core and Class-B vacancy rates are expected to peak.

“It’s a sea change going on out there right now,” Wolfgram says. “We think this will continue for the next several years. The Class-B market is not going to get all filled up anytime soon.”