R3 Re­cov­ery: Looking ahead

Ottawa Business Journal - BOMA Magazine - - Cover Story: The Four Rs -

Across the coun­try, and cer­tainly in Ottawa, ma­jor eco­nomic in­di­ca­tors sug­gest that we are well on our way to­wards re­cov­ery. Within that pic­ture, it is im­por­tant to re­mem­ber that the com­mer­cial real es­tate mar­ket, in any ju­ris­dic­tion, has al­ways been cycli­cal. Fred Speer of Brook­field Prop­er­ties has decades of ex­pe­ri­ence with the ebb and flow of the com­mer­cial real es­tate mar­ket. He re­minds us, how­ever, that the fed­eral mar­ket and pri­vate sec­tor mar­ket each run on dif­fer­ent cy­cles. While the fed­eral mar­ket has felt rel­a­tively mi­nor ef­fects from the most re­cent re­ces­sion, there are el­e­ments of the mar­ket which will be slower to re­cover. He notes that any area of the city that is more de­pen­dent upon the pri­vate sec­tor will take longer to reach a re­cov­ery state.

Mr. Speer is quick to point out that the fed­eral sec­tor, pri­mar­ily based in down­town Ottawa, has al­ways been very re­li­able, with very low va­cancy rates. He even ven­tures to sug­gest that Ottawa is the best mar­ket in the world in terms of its sta­bil­ity. It is, as he ex­plains, a very con­sis­tent mar­ket, quite dif­fer­ent than other cities like Cal­gary, Van­cou­ver or Toronto which are some­times de­scribed as more glam­orous –and more tem­pes­tu­ous – mar­kets. Be­cause Ottawa is so sta­ble, it some­times gets over­looked from a com­mer­cial real es­tate news per­spec­tive, due to its lack of volatil­ity. Those in the in­dus­try out­side Ottawa of­ten can­not ap­pre­ci­ate how dif­fer­ent it can be to deal with the fed­eral gov­ern­ment ver­sus the pri­vate sec­tor – things are sim­ply done in a very dif­fer­ent way, says Mr. Speer. He notes that all fed­eral ten­ants com­bined, in­clud­ing Crown Cor­po­ra­tions and other agen­cies, oc­cupy about 75% of Ottawa’s of­fice space, most of which is man­aged by Pub­lic Works and Gov­ern­ment Ser­vices Canada. As a re­sult, Ottawa has al­ways done quite well be­cause of this large fed­eral pres­ence. Gov­ern­ment spending in the area of real prop­erty has al­ways been steady and, given the scope of the or­ga­ni­za­tion and the huge vol­ume of staffing in­volved.

The mar­ket, how­ever, is far from be­ing just a story of steady growth to ac­com­mo­date new hires. Given that the av­er­age age of fed­er­ally owned build­ings is about 60 years, Trea­sury Board is push­ing to mod­ern­ize both older owned and older leased build­ings for im­proved ac­ces­si­bil­ity and to meet cur­rent en­vi­ron­men­tal stan­dards. The work to be done to re­fresh this fed­eral in­ven­tory presents a longterm op­por­tu­nity for de­vel­op­ers in Ottawa. Not only is there work to be done to up­grade th­ese older build­ings; ten­ants will also re­quire swing space while their old sites are be­ing retro­fit­ted or up­graded. While new builds will be im­por­tant, this retrofitting could eas­ily be a big re­cov­ery project for the Ottawa mar­ket.

Mr. Speer of­fers prac­ti­cal ad­vice for real es­tate com­pa­nies looking to kick-start their own re­cov­er­ies by tap­ping into the pri­vate-sec­tor mar­ket. His sug­ges­tions in­clude cre­at­ing or retrofitting space that can be sub­di­vided eas­ily, es­pe­cially in Kanata where he be­lieves a lot of the flex­i­bil­ity that com­pa­nies are now looking for was lost in the rush to build for high tech. He be­lieves that there could be a tremendous syn­ergy that would come from the de­vel­op­ment of an of­fice colony in Kanata, which would serve as a mag­net to draw other com­pa­nies to the area. He also ad­vises not to build on spec­u­la­tion to­day, not­ing that prop­er­ties should be pur­pose-built but with an eye to flex­i­bil­ity, which will ul­ti­mately give you more long-term se­cu­rity.

As one of Kanata’s big­gest boost­ers, Martin Van­de­wouw, pres­i­dent of KRP De­vel­op­ment Group, is pleased to re­port that Kanata is now on the radar for the fed­eral gov­ern­ment as it seeks new fa­cil­i­ties for its work­force. Ob­vi­ously, he says, Kanata would like to get a big­ger piece of this de­mand and, if the pub­lic sec­tor con­tin­ues to take space out­side down­town, Mr. Van­de­wouw is con­fi­dent the mar­ket in Kanata will start to be­come more bal­anced. He is en­cour­aged by the fact that within the fed­eral gov­ern­ment and par­tic­u­larly Health Canada there are some strong ad­vo­cates for mov­ing to the

west, and he is quick to point out the ad­van­tages to work­ing in Kanata, in­clud­ing lots of free park­ing, a re­verse com­mute and a nicely dif­fer­ent en­vi­ron­ment than down­town, with more recre­ational and green space.

Mr. Van­de­wouw, who has been with KRP since 2002, feels that the mar­ket in Kanata is ac­tu­ally tougher now than it was right af­ter the tech­nol­ogy sec­tor went bust in 2001. He doesn’t think they’ve hit the bot­tom yet in terms of the pri­vate sec­tor in Ottawa, and be­lieves there is still some ra­tio­nal­iza­tion yet to hap­pen. He notes that the re­al­i­ties of the mar­ket to­day are chal­leng­ing be­cause the plight of the pri­vate sec­tor is some­times over­looked given the strength of the pub­lic sec­tor.

Like other Kanata ad­vo­cates, he be­lieves that the fed­eral gov­ern­ment can make a huge pos­i­tive im­pact by tak­ing more space in the west. Un­like any other sub­ur­ban ar­eas of Ottawa, Kanata has a sig­nif­i­cantly de­vel­oped com­mer­cial core – any­where from 4 to 5 mil­lion square feet of of­fice space. With a va­cancy rate of 15%, Kanata of­fers a huge al­ter­na­tive to al­le­vi­ate the down­town con­ges­tion and re­duce the num­ber of com­muters head­ing to the core. Mr. Van­de­wouw is con­vinced that from an over­all mu­nic­i­pal plan­ning per­spec­tive it sim­ply makes good sense to have a com­mu­nity where one can work, live and play.

He ac­knowl­edges that while the no­tion of hav­ing fed­eral de­part­ments re­lo­cate to Kanata does have its de­trac­tors, in­clud­ing those who sug­gest that too many pub­lic ser­vants are un­will­ing to com­mute from Gatineau and Orleans, the num­bers also sug­gest that a sig­nif­i­cant num­ber of the fed­eral gov­ern­ment’s work­force live to the south and west of the city’s core. Mr. Van­de­wouw says he of­ten hears that Kanata is not vi­able be­cause of a lack of pub­lic tran­sit, how­ever, there are many routes al­ready in place, and he is con­fi­dent that more will be added by OC Transpo when de­mand from their largest cus­tomer war­rants. He adds that what many won’t ad­mit is that the tran­sit story is not as big an is­sue as some would have us be­lieve, be­cause peo­ple are happy to car­pool to Kanata, given the abun­dance of free park­ing.

Mr. Van­de­wouw notes that there is great va­ri­ety in terms of the space avail­able in Kanata, in­clud­ing build­ings with 40,000 and 50,000 square foot floor plates, which would be ideal for gov­ern­ment. In ad­di­tion, stud­ies have shown that once you are more than 2 floors apart, it doesn’t mat­ter if you are in the same build­ing, so hav­ing space in sev­eral nearby build­ings would work out as well. Best of all is that this abun­dance of ex­tremely high-qual­ity space of­fers ex­cel­lent value, typ­i­cally leas­ing at about one-third the cost of down­town, of­ten with room to ex­pand if needed. He notes that many ser­vice-sec­tor or­ga­ni­za­tions such as ac­count­ing and le­gal firms have left down­town to set up shop in Kanata and are en­joy­ing the

lower costs and many other ben­e­fits. Mr. Van­de­wouw points to Kanata’s boom­ing hous­ing sec­tor as one more strong sup­port­ing ra­tio­nale. Given that peo­ple clearly want to live out here, they should be able to work here as well, he ar­gues. It has been proven that work­ing and liv­ing in close prox­im­ity en­hances one’s qual­ity of life, and Kanata of­fers that very pos­si­bil­ity.

When it comes to tap­ping into the fed­eral gov­ern­ment mar­ket, Mr. Speer sug­gests one must be mind­ful that there are three groups that must be sat­is­fied in any trans­ac­tion – the ac­tual client depart­ment, Pub­lic Works and Gov­ern­ment Ser­vices Canada and Trea­sury Board. It is hard for peo­ple who are not used to work­ing in this space to un­der­stand the way this mar­ket works in Ottawa, par­tic­u­larly the size of the trans­ac­tions in­volved as the gov­ern­ment needs a lot of space and th­ese gen­er­ally need to be big spa­ces.

So what does the fu­ture hold? Mr. Speer be­lieves that the days of en­trepreneurs tak­ing big risks are done. He notes that with many build­ings to­day, de­vel­op­ers have other own­ers be­hind them, such as pen­sion com­pa­nies, who tra­di­tion­ally tend to be more risk averse. This will con­tinue to keep the mar­ket run­ning at a more slow and sta­ble pace. In the short term, he sees things as looking pos­i­tive for the next sev­eral quar­ters. While there will not likely be a flood of sub­let space or new build­ings, things will con­tinue to hum along steadily as they have in the past. In the long term, he cau­tions that it is hard to spec­u­late but the fed­eral gov­ern­ment will likely con­tinue to de­ter­mine the health of the Ottawa mar­ket. Their big­gest im­pacts could come from cut­backs to pro­grams or de­cen­tral­iza­tion, but nei­ther of th­ese pos­si­bil­i­ties is in the fore­cast at present.

Per­haps the best way to un­der­stand the unique­ness of Ottawa’s cur­rent real es­tate sit­u­a­tion is to con­sider it as be­ing af­fected two dis­tinct en­ti­ties. As Bob Perkins of the Tag­gart Group ex­plains, one por­tion of the mar­ket op­er­ates in tan­dem with the gen­eral econ­omy. When things turn around and im­prove, lo­cal or­ga­ni­za­tions which may not have felt a sig­nif­i­cant re­ces­sion­ary pinch may nev­er­the­less feel the op­ti­mism to add staff or ex­pand. This group would in­clude lo­cal offices of na­tional com­pa­nies who have been ask­ing for cut­backs across the board even though things have not been par­tic­u­larly dif­fi­cult here in Ottawa. Once the gen­eral eco­nomic un­cer­tainty lifts, we should see a nice in­cre­men­tal ap­proach as th­ese same com­pa­nies start to grow again in an or­ganic way, which will in turn stim­u­late the lo­cal com­mer­cial real es­tate mar­ket. This un­leash­ing of or­ganic growth should start by the end of this year and will have a larger ef­fect on the over­all mar­ket.

The sec­ond as­pect of Ottawa’s mar­ket, ac­cord­ing to Mr. Perkins, will be a sec­ond wave likely to af­fect real es­tate hold­ers as debt ma­tures. Al­though we’ll likely see a smaller wave here in Ottawa com­pared to other cities, this wave will have its great­est im­pact on some of the smaller hold­ers of real es­tate who may find them­selves un­able to re­fi­nance. While this will cre­ate an un­for­tu­nate sit­u­a­tion for some, it will gen­er­ate op­por­tu­nity for those who are seek­ing to buy up prop­er­ties as they be­come avail­able. This ac­tiv­ity will be wel­come in a mar­ket which has been very quiet of late. Mr. Perkins ex­plains that we have seen few sales in the past year be­cause, as is typ­i­cal dur­ing a re­ces­sion, buy­ers have been ex­pect­ing to find bar­gains, while sell­ers are si­mul­ta­ne­ously hold­ing out for pre-down­turn prices. As the econ­omy bright­ens, this gap should close thereby stim­u­lat­ing more turnover, but it might take a year for that to start hap­pen­ing.

Given the cur­rent lack of ac­tiv­ity in the lo­cal com­mer­cial real es­tate in­dus­try, Mr. Perkins feels it will be in­ter­est­ing to see the in­dus­try come back to life and pre­pare for busier times ahead, but some com­pa­nies will be bet­ter po­si­tioned to take ad­van­tage of the re-awak­en­ing of the mar­ket. His ad­vice? Any firm that wants to be ready to em­brace the fu­ture should cur­rently be busy mak­ing sure all sys­tems and staffing are in place be­fore the mar­ket turns and things heat up, as they in­evitably will.

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