Higher vacancy rates in office buildings are pushing rents down in Ottawa, according to a new report by real estate firm Colliers International.
By Jacob Serebrin
Office vacancy rates across the city averaged 9.7 per cent during the first three months of 2014, according to the report. That’s a 1.1 percentage point increase from the same period the year before.
That increase is pushing rents down, Colliers says. The average office lease cost $17.19 per square foot during the first quarter of 2014, down from $18.11 per square foot during the same period last year.
The shrinking size of the federal civil service and its move away from higher-priced downtown office space is driving the trend, Colliers says.
The brokerage firm says this isn’t likely to change any time soon, either.
Colliers is predicting double-digit vacancy rates to continue for the next two years and for rents to keep dropping until the fourth quarter of this year, when it says they’ll flatten out to an average of $17 per square foot.
“The lack of foreseeable pipeline of new tenants or demand for office space, coupled with the fact that the city’s office market is dominated by only one major player, may shun investors’ appetite away from considering Ottawa as a viable investment destination,” said Kelvin Holmes, managing director with Colliers International in Ottawa, in a press release.
“Furthermore, the current discussions between (the Building Owners and Managers Association, an industry group) and the city around the increase in development charges add another layer of uncertainty that may hamper the development and re-development of properties around the city, decreasing the potential to attract new business and investment inflow.”
Despite lower rents, the report says that “demand has remained relatively soft and is dwindling.”
As a result, landlords are getting more competitive in attracting the few tenants that are on the market for new space, Colliers says.
“The weak demand for office space, especially in Class B and C properties, is pushing landlords to find creative ways to attract and retain tenants,” Mr. Holmes said.
“In addition to the greater flexibility and incentives offered by landlords to occupants, there is also a mind shift in the way properties are being marketed. There is a greater focus on the attributes of the office space and its surroundings, such as proximity to public transportation and amenities, as factors that drive and help tenants attract and retain talent.”
The Ottawa’s downtown core - home to 43 per cent of the city’s office space - has seen the biggest jump in vacancy rates, increasing to 8.8 per cent from 6.9 per cent.
As a result, the average asking net rent is down to $22.05 per square foot this year from $23.24 per square foot last year.
The area including the ByWard Market and the Glebe, which Colliers calls the “fringe core,” had the lowest vacancy rates in the city, at 6.2 per cent. That area, which is home to 10 per cent of the city’s office space, saw no change in vacancy rates year-over-year. Despite that, rents were down from $17.49 to $15.53 per square foot.
Only Kanata saw vacancy rates decline, but that area still has the highest vacancy rates in the city. Vacancy rates were down to 13.4 per cent in 2014 from 15.4 per cent last year.
Rents were also down in the area to $12.07 from $12.11 per square foot.