Downtown Ottawa office vacancy rates inch up despite growing government

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An anticipated drop in office vacancy rates failed to materialize last year, despite a massive increase in government spending and the local hiring of thousands of civil servants, according to a new report.

Real estate services firm Avison Young said the city’s office market recovery has “stalled.” While still relatively healthy, especially compared to cities such as Calgary that are struggling under low energy prices, vacancy rates in Ottawa rose in 2016.

“Last year, we were anticipating a slight drop in the vacancy rate, which is what typically happens after a change in government, especially a Liberal government,” said Michael Church, the managing director of Avison Young’s Ottawa office.

Instead, the downtown availability rate actually rose by 80 basis points during 2016, the firm reported.

The findings echo a separate report by Colliers International that said Ottawa’s downtown vacancy rate inched up 10 basis points from 10.8 per cent at the end of 2015 to 10.9 per cent at the end of last year.

The federal government is Ottawa’s largest office tenant, particularly in the downtown core. For much of the 2000s, the city’s central business district had one of the tightest vacancy rates in the country in large part due to the federal government’s demand for space.

However, the market began to loosen up several years ago as the Conservatives cut spending and Public Works officials reduced the federal government’s downtown footprint by moving civil servants into buildings elsewhere in the National Capital Region, such as the Ottawa Train Yards.

One reason that a growing federal government has not led to lower vacancy rates over the last year is that civil servants are increasingly using less physical space.

The government’s office modernization program, known as Workplace 2.0, places a greater emphasis on flexible and mobile workstations – leading to smaller space requirements – as well as other features such as more natural light and better indoor air quality.

This puts owners of older buildings at a disadvantage. They’re also affected by rising vacancy rates in newer properties, as some tenants take advantage of softening rents to upgrade to higher-quality space.

While C-class buildings only represent a small portion of the downtown market, vacancy rates are standing at more than 21 per cent, according to Avison Young figures. The B-class market is performing better, with a vacancy rate of 12 per cent.

By comparison, Avison Young said the class-A vacancy rate is 7 per cent.

“There is a lot of product that we have downtown that may be past its best-before date,” Mr. Church said. “And that’s where the vacancy is.”

The pressure on B-class and C-class landlords is causing some property owners to make “very aggressive deals” with tenants and, in some causes, launch major renovations, Mr. Church said.

One notable example is the MacDonald Building at 123 Slater St., at Metcalfe Street.

After the federal government vacated the property in 2013, landlord Metcalfe Realty put the building through an “extensive architecture transformation” that included a new entrance facade, a two-storey lobby as well as remodelled washrooms, corridors and new computer-dispatched elevators.

Looking ahead, Mr. Church said he expects a small drop in downtown vacancy rates in 2017. As traffic across Ottawa continues to get heavier, he said he expects interest in centrally located office space will increase ahead of the city’s light-rail line entering operations in 2018.