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Scarcity best describes the state of commercial real estate in Ottawa, with all asset classes reporting product shortages except for office space in the city’s downtown core. Industrial sales and leasing remain tightest, with demand greatest for manufacturing, warehousing and distribution facilities. While availability rates edged up year-over-year in Ottawa, according to a recent report by Altus Group, vacancy rates remain stubbornly low, hovering at just over one per cent. Competition is fierce in the marketplace, with little product available, particularly within the urban boundaries.

Land sales have exploded in 2023 with industrial land now fetching $1 million an acre (and has moved for as high as $1.2 million an acre in recent months). With the expansion of the city’s official plan, there’s also been an uptick in the sale of development land for residential use, with purpose-built rentals and condominiums a top priority. Projects with approvals in place tend to move quickly, as evidenced by the recent quarter billion-dollar sale for a mixed-use development on 55 acres. The revitalization of LeBreton Flats, according to the LeBreton Flats Master Concept Plan, continues unabated, with several new buildings underway and applications for two more high-rise buildings under consideration. The Aqueduct District, situated within LeBreton Flats fronting the Ottawa River, will be ground zero for development in Ottawa over the next decade.

Retail has also experienced growth this year, especially in sought-after areas such as Westboro, Glebe, Centertown, and downtown. Demand for retail storefront in high traffic areas has been especially brisk. Malls and shopping centres are also doing well, with the Hudson’s Bay Company recently relaunching the Zeller’s brand within their locations in Rideau Centre and St. Laurent Shopping Centre. Chapters-Indigo recently closed its bookstore on Rideau St. to relocate to a new, large-format store within the Rideau Centre.

The office sector has had its challenges during the pandemic and its aftermath, with civil servants recently identifying the ability to work from home as a major bargaining chip in their contract negotiations. There are some very real questions regarding the future of commercial office space in downtown Ottawa, given that the city’s largest employer will likely not require as much space as it has had in the past. That said, the price per square foot for leased space has flatlined, but limited supply at this point is keeping current prices elevated. Altus Group recently pegged the availability rate for office space at 12.5 per cent in Ottawa during the first quarter of 2023, up from year-ago levels, but still amongst the lowest levels in the country. While the impact on downtown office leasing has yet to be determined, one commercial office building is already transitioning to residential. It’s expected the buyer will keep the existing structure but gut the interior down to the concrete base and reconfigure for residential use. Small office buildings, on the other hand, are in high demand throughout the city, with medical services the typical end user.

Opportunities currently exist within Ottawa for commercial investors, many of whom are attracted to the market because of its reasonable price point. Small office building, industrial buildings, and residential land, particularly product on the greenbelt, all represent a solid investment strategy. For those looking longer term, commercial office space is expected to bounce back, against a backdrop of population growth both nationally and within Ottawa itself.

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Commercial real estate in Ottawa is gaining momentum, with almost all asset classes reporting strong demand in 2022, according to the new 2022 Commercial Real Estate Report from RE/MAX Canada. Investment activity* topped $3.8 billion in 2021 and 2022 is shaping up to be even stronger. Industrial continues to deliver the strongest performance, with limited inventory presenting serious challenges so far this year. Retail has come to life in recent months, with demand for space escalating in lock step with easing pandemic restrictions. Suburban office space is also surprisingly strong, especially in the Kanata area, where vacancy rates now hover at under seven per cent.

Ottawa’s central location to the 400-series highways and the US border has proven attractive to industrial investors. While intent exists, a shortage of available inventory for both lease and sale has fallen short of demand, especially in the popular west end. Availability rates* for industrial hovered at 1.7 per cent in the first quarter of 2022, down from 3.1 per cent during the same period in 2021. Lease rates continue to climb—rising almost 30 per cent over the past two years ($12 net to $15.50). In the city’s east end, smaller space is almost impossible to find, with listings that do come on stream snapped up quickly, often at a premium.

Retail has rebounded with a vengeance, with little space available for smaller tenants, especially in the city’s top malls, including the Rideau Centre, Bayshore Shopping Centre, Carlingwood Shopping Centre, and St. Laurent Shopping Centre. Retail storefront is also scarce, especially for units ranging in size from 1,500 to 2,000 sq. ft, in prime retail areas like the Byward Market, Bank St., the Glebe, and Westboro. Negotiations with landlords are more complicated than in years past, with many wanting guarantees in the form of personal covenants. The glut of space available last year has been absorbed, albeit at a slightly lower lease range. New developments with ground floor retail are also cropping up. More cranes are noticeable, especially in the popular Byward Market. Suburban retail is also doing well, with product hard to find in some of the big box malls. Much of the new tenant mix is comprised of fitness industry, restaurants and fast food. Drive-thrus remain highly coveted.

Office space in the downtown core continues to face its challenges, with most employees in government offices still working from home. Fewer in-person meetings have also reduced required office space for organizations, charities and lobbyists that frequent Parliament Hill. Landlords, as a result, have become increasingly competitive, with inducement ranging from first-year-free rent to leasehold improvements. Availability rates* in the office sector have trended downward, now sitting at 10.9 per cent compared to 11.4 per cent in the first quarter of 2021. At the same time, the relatively low interest rate environment has generated an upswing in demand for office buildings in suburban areas like Kanata. Most are smaller, commercial buildings ideal for professional offices, generally sought-after by end users.

Land scarcity has prompted creativity, with many small builders amassing infill properties throughout the city. Residential land within the official plan is hard to come by, and infill prices have risen to levels not seen before. However, with rising construction costs, labour shortages, and current market uncertainties, there has been an influx of new listings as those builders move to sell their lots—some including approved site plans.

Multi-unit residential remains strong in Ottawa with several projects currently underway. Most are mixed use, including purpose-built residential apartments with commercial/retail on the ground floor. While vacancy rates for purpose-built rentals were at 3.4 per cent** in October 2021, the combination of climbing interest rates and high housing values are expected to prompt more demand for rental accommodations. Several new projects have been proposed in Westboro, while application has been made by the Rideau Centre to construct 280 luxury, purpose-built rental apartments on the southeast corner of the centre. The plans, which include restoration of a more than 100-year-old heritage building, will help to recoup losses incurred during the pandemic and aid in the creation of much-needed rental accommodations.

Economic expansion is well underway in the Ottawa-Gatineau region, with GDP growth expected to hover at 3.4 per cent in 2022, according to a recent report by the Conference Board of Canada. In-migration is forecast to play a role in the year ahead, as the city’s strong technology, construction, and to a lesser extent, manufacturing industries continue to experience growth. Against this backdrop, the city’s commercial market should remain vibrant, with improvements projected in the office sector as the pandemic recedes from the forefront.

*Altus Group

** CMHC Rental Market Survey, October 2021