Ottawa had a glimpse of good news to end 2023, with overall office vacancy dropping to 13.3% in the fourth quarter, the first office vacancy decrease the city has seen since Q1 2022.
The Capital Region’s industrial market took delivery of 646,845 square feet of new supply last year, with 260,073 square feet of it coming in the final quarter alone. And there is another 733,984 square feet of industrial space under construction.
We caught up with CBRE Ottawa Managing Director Louis Karam to find out what he’s tracking in the commercial real estate market this year.
We finished 2023 with a slight decrease in office vacancy. The fluctuation is the result of some buildings being converted to multi-res and being taken out of the inventory. But in general it seems we’ve hit a plateau with office vacancy. There is a sense of optimism right now but we’re not out of the woods.
We are still talking about hybrid work. It’s less of a prominent conversation but it’s still being discussed. Most companies are down to two to three days of work at the office. Our Kanata tech-focused submarket experienced a slowdown. This was the impact of people working remotely but also the cooling of the tech sector, overcorrection of previous growth, layoffs and space being put on the sublease market. Landlords have felt the impact.
The Feds and the tech sector were driving the Ottawa economy and the commercial real estate market. Both slowed down in 2023. I’m not expecting the trend to change radically in 2024, however, tenants now have a better understanding of their usage of space. I expect tenants to commit to office space in 2024 even if it is in smaller footprints.
The flight to quality will be even more pronounced in 2024. Buildings that are highly amenitized, where landlords are investing in the property, will see activity. Constitution Square is a perfect example of this flight to quality and we’re expecting increased and sustained activity there in 2024.
Ottawa is also leading the charge on the conversion of office space into multifamily. Developers are buying office buildings with the intention to convert them. 110 O’Connor is the latest – it’s being demolished and multifamily is being built on the site.
These conversions have two immediate benefits: the removal of old office buildings from our inventory (therefore reducing our office vacancy rate) and the creation of much needed housing, which brings people downtown. It re-energizes the downtown and will be key in the re-envisioning of our city.
Our research team published a white paper on this. Canadian Urban Institute did a study that identified older buildings across Canada that were ripe for conversion. It showed that Ottawa had lots of potential. Can we solve our vacancy issues by converting office to residential? The answer is No, but this is part of the solution.
The cooling off of industrial activity was slightly delayed for us in Ottawa compared to other major markets in 2023. We saw strong demand and activity for the first three quarters, pushing down industrial availability. But with the new supply hitting the market in the final quarter of 2023, the availability rate ticked back up. I expect this trend to continue in 2024.
Throughout the pandemic, the rapid acceleration in e-commerce trends and the global supply chain disruptions caused an increased demand for local warehousing space. This demand is now levelling off and the new supply is catching up to this spike of demand.
We had nearly 650,000 sq. ft. of new supply hit the market throughout 2023, the largest amount of yearly new supply in a decade. There’s more than 700,000 sq. ft. of industrial space under construction and expected to be delivered in 2024. I expect that it will take some time to fully absorb this new inventory.
For the developments being done on spec, we are seeing lower pre-leasing numbers and for the ones waiting for a tenant before kicking off construction, we may see some delays. That said, the fundamentals of our industrial market remain strong and my outlook on the sector is optimistic for 2024.
Foot traffic, dwell time and sales are expected to continue rising in Ottawa’s enclosed malls throughout 2024. And new brands and brand concepts will lead the leasing market, primarily in the food and entertainment categories.
Supply will remain tight and demand will continue to compete for well positioned opportunities as they become available.
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