R3 Recovery: Looking ahead
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.