Ottawa’s commercial real estate market continued to feel the impact of COVID-19 in the closing months of 2020 as the city’s office vacancy rate rose for the fourth quarter in a row.
The city-wide office vacancy rate jumped seven-tenths of a percentage point to 8.7 per cent in the period from October to December, real estate firm CBRE said in its latest market report.
With the restrictions aimed at controlling the spread of the virus keeping many workers hunkered down at home, office towers across the region have been hollowing out over the course of the pandemic.
All told, tenants shed nearly 800,000 square feet of office space last year – the highest net negative absorption of real estate in Ottawa since 2002.
Landlords in the city’s core bore much of the brunt of the shift to a digital-by-default work model. The vacancy rate in central Ottawa stood at 8.8 per cent in the fourth quarter, up three full percentage points over a year earlier.
High-profile tenants vacate space
Almost 700,000 square feet of that unoccupied space is located in class-A buildings in the central business district. Nearly half of that total is up for sublet after a spate of high-profile tenants, including Shopify and tech firm OpenText, chose to vacate offices they no longer deemed necessary.
An additional 160,000 square feet of space was added to the sublease market in the fourth quarter, bringing the total amount of space available to sublet to nearly 700,000 square feet. While that’s up substantially from the start of the year, it’s still far less than the 2.5 million square feet of space on the sublease market during the dot-com bust of 2003.
Meanwhile, the suburban vacancy rate rose to eight per cent, a jump of 160 basis points year-over-year.
In Kanata, the vacancy rate hit 10.3 per cent in the fourth quarter, the first time in three years it’s been in double digits. Nearly 100,000 square of space was thrown back on the market in the city’s tech hub last quarter after software firm Entrust vacated offices at 1000 Innovation Dr.
However, the office exodus appeared to put little downward pressure on rents. Class-A rents remained virtually unchanged from the end of 2019, averaging $24.20 in the downtown core.
“Considering the office market endured minor changes in rents over the last year, it can be expected that little will differ moving into 2021,” CBRE said. “New subleases can be expected while others will expire shortly. However, it will be interesting to see how sublandlords compete.”
Nearly 850,000 square feet of new office space is now under construction, according to CBRE, including 195,000 square feet at the Zibi mixed-use development west of downtown and software firm Kinaxis’s new 153,000-square-foot headquarters in the Kanata West Business Park.
Despite the steady rise in office vacancies over the past 12 months, CBRE said it remains confident the Ottawa market will stabilize once the pandemic gets under control.
Industrial market gaining steam
“With the arrival of the vaccine to Canada, it is expected that there will be a renewed interest in the office market,” the report said. “This marks the time for office occupiers to think critically about their real estate requirements and how to foolproof their real estate decisions for the years to come.”
Meanwhile, CBRE said the capital’s industrial market continues to build momentum as the region evolves into a growing e-commerce distribution hub.
The overall vacancy rate dropped to 2.7 per cent in the fourth quarter, among the lowest it’s been in the past decade. While CBRE said sublease space is at its highest levels since 2016, it added that “leasing activity is steady and significant interest in the Ottawa market persists, alluding to a promising 2021.”
Noting that the largest industrial construction project in the city’s history – Amazon’s 2.8-million-square-foot fulfilment centre in Barrhaven – is set to be completed later this year, CBRE said the explosion in online shopping during the pandemic is paying dividends for the National Capital Region.
“There has been continued growth of last-mile logistics in Ottawa and an increased acceptance of e-commerce as 2020 has morphed the way business is done,” the report said.