Ottawa’s office vacancy rate tops 11% in Q4 as experts forecast ‘bumpy road’ ahead for landlords

January 10, 2023

That’s up from 10 per cent in the previous quarter and more than four percentage points higher than it was in late 2019, before the pandemic triggered a dramatic shift to remote work that hollowed out office towers across North America.

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Ottawa’s office vacancy rate jumped more than a full percentage point in the fourth quarter of 2022, CBRE says, and many experts predict vacancies will continue to rise in 2023 as employers reassess their need for space in an increasingly hybrid work world. The capital’s office vacancy rate was 11.1 per cent at the end of December, the real estate brokerage said Tuesday in its latest national market report. That’s up from 10 per cent in the previous quarter and more than four percentage points higher than it was in late 2019, before the pandemic triggered a dramatic shift to remote work that hollowed out office towers across North America. CBRE senior vice-president Louis Karam said Ottawa’s situation mirrors the rest of the country. Canada’s overall office vacancy rate rose to 17.1 per cent at the end of 2022 after holding steady at 16.4 per cent in the two previous quarters. The only urban areas in which vacancy rates fell in the fourth quarter were Halifax, Waterloo Region and Winnipeg. “It’s consistent with the rest of Canada,” Karam said of Ottawa’s performance. “It’s not coming as a surprise.” The fourth quarter saw numerous big chunks of real estate returned to the market, both downtown and in the suburbs. At 77 Metcalfe St., for example, 130,000 square feet of space became available when NAV Canada’s lease ended last fall, while 57,000 square feet was vacated on Innovation Drive in Kanata and another 40,000 square feet at 560 Rochester St. in Little Italy. In total, nearly 380,000 square feet of space was put back on the rental block last quarter, including more than 230,000 square feet outside the downtown core. The downtown vacancy rate rose to 12.2 per cent, up from 11.5 per cent in the previous quarter, while the suburban rate increased to 10.2 per cent from 8.8 per cent. Karam said he expects the city’s vacancy rate to tick up in the months ahead. He cited a number of factors for the continued market turbulence, including the fear that a looming recession will dampen revenue growth and business profits, widespread downsizing amid a massive market correction in the tech sector and “general uncertainty around hybrid work patterns” that has prompted many employers to press pause on return-to-office plans. “It’s going to continue to be a bumpy road,” Karam said, adding the federal government’s recent mandate requiring workers to return to the office two or three days a week beginning this month could be the “light at the end of the tunnel” landlords were hoping for to help kickstart leasing activity. Veteran broker Martin Aass, who represents tenants across the city, told OBJ Ottawa will likely continue to be a renter’s market throughout 2023. “I think it’ll get worse before it gets better for people who own buildings,” said the managing principal at the Ottawa office of multinational real estate firm Cresa. Aass said more and more landlords are dangling significant inducements in a bid to lure tenants who suddenly find themselves spoiled for choice in what’s traditionally been one of the country’s tightest office markets. In addition to “goodies” like months of free rent, renovation allowances and more flexible lease terms, some property owners are now offering tenants free parking, he explained, “which is something I’ve never seen in 20 years of real estate.” Still, Aass said he doesn’t believe the work-from-home trend will become permanent. Even many hybrid arrangements will gradually fade away, he argued, as more businesses mandate a full-time return to the office. “I think that the air coming out of the economy is going to make it more likely that employers kind of get what they want,” Aass said. “I speak to enough senior leaders that say their productivity has been crushed over the last three years. They’re all saying people have got to be together. I just think in time it’ll be back to what it was before COVID. It’s a question of how long it takes.” Shawn Hamilton, Canderel’s Ottawa-based vice-president of business development, said office tenants are trying to navigate economic headwinds at the same time they’re grappling with the changing nature of work. “This isn’t unheard of,” Hamilton said. “It’s just a natural reaction to business pulling back a bit in the face of uncertain times.”