Ottawa Commercial Real Estate Market Experiences Stable Q1, Growth in Q2

2024 Ottawa Commercial Real Estate Trends

While stability characterized first-quarter activity in the Ottawa commercial real estate market this year, improvement has been noted in the second quarter as investor appetite for commercial properties grows, according to the RE/MAX 2024 Commercial Real Estate Report. Industrial continues to be the city’s top-performing asset class, with demand outpacing supply in key areas of the city. Rapid growth is underway in Ottawa and surrounding areas as the region transitions into a distribution hub for Eastern Canada and, to a smaller extent, the Eastern US seaboard.

Availability rates for industrial in Ottawa were the lowest of all major Canadian centres in the first quarter of the year, sitting at 3.8 per cent, just slightly ahead of year-ago levels for the same period, according to Altus Group. Many industrial property owners are not interested in selling. Tenants are expanding operations at record pace. Smaller industrial space is extremely limited, with scant availability in central Ottawa at present. Owner-users tend to seek out smaller buildings while single tenants are usually in older, stand-alone buildings. Four very large, new projects with spaces of 20,000 sq. ft. and up are in the final stages of construction with vacancies filling fast for large users and distributors. Lease rates on new buildings with high ceilings currently hover at $18 per sq. ft. (net). Only five industrial buildings are “officially” on the market at present, with pricing that ranges from $300 to $400 per sq. ft.

Given the currently supply crunch in Ottawa’s residential housing market, builders and developers have shifted their focus from condominiums to rental apartments that typically offer a better return. According to Urbanation’s Q1 2024 Ottawa Rental Market Results, rental market conditions tightened in Ottawa during the first quarter of the year as demand strengthened and new supply slowed. Just 131 units were completed in Q1 2024, on the heels of a multi-decade high of 3,194 units in 2023. Fifty-seven per cent of the 111,276 apartment units proposed for development across Ottawa have been approved. Demand continues to outpace supply in the city, with vacancy rates hovering at 1.6 per cent in the first quarter. Average rental rates for purpose-built rentals edged higher as a result, rising six per cent to $2,462 in the first quarter of 2024, compared to $2,319 posted during the same period in 2023.

Land shortages have been reported but could be easily remedied if the city chose to make changes to its existing zoning plan. That said, residential builders and syndicates continue to buy up suburban land on speculation. Most projects take at least three years to become shovel-ready with almost all builders now hiring professional planners to facilitate the process. Real Estate Investment Trusts (REITs) continue to be active in the Ottawa market, with investment concentrated on the residential apartments that complement their existing portfolios, including office buildings in the core and large retail shopping centres in the suburbs.

While office space has had its challenges in Ottawa’s downtown core, seven office buildings are now undergoing conversion to residential apartments, which has removed a sizeable amount of square footage from the overall market. Currently in the process of transitioning from a B-class office building to an apartment is 200 Elgin. The six other buildings have completed the conversion process or are in the finishing stages of conversion to residential. Office vacancy rates currently hover at 11 per cent in the downtown core but would be closer to 19 per cent had conversion not occurred.

The post-pandemic desire to work from home continues to impact employers in the Ottawa area, with the city’s largest employer, the federal government, moving to bring civil servants back to the office for three days a week. Ample demand for quality office space in A-class buildings exists in the downtown core, with most prospective tenants seeking greater square footage, while older B and C-class buildings are losing tenants as support services to the federal government downsize. This trend has impacted retail operations in the core, particularly restaurants in close proximity to government offices. Movement to central Ottawa has also been stifled in large part due to expensive parking rates. The suburbs, however, continue to flourish, with office space in Barrhaven, Ottawa’s newest and fastest-growing suburb, almost impossible to find. Steady demand also exists for tech-space in Kanata.

On the whole, the city’s retail sector is stronger than expected, as availability rates have edged slightly downward. Consistent demand for retail properties exists, but supply remain tight. Strip plazas are coveted by investors but unlike other areas of the country, most developers are not interested unless the land size and zoning are appealing. The city’s two major malls have added new tenants but show little interest in adding residential components to their properties. Revitalization efforts are underway to improve the historical ByWard Market with the introduction of the $129 million ByWard Market Public Realm Plan. Construction is expected to commence in 2025, which will include a transformation of the area bordered by George St., Sussex Dr., St. Patrick Street, and Dalhousie Street. The vast undertaking, the first phase of which is scheduled for completion in 2027, will ultimately create an enviable local retail/social hub and tourist attraction over a 15-year period, bolstering foot traffic to the area.

Although interest rates have made tenants and buyers more skittish, there has been greater movement in recent months, with customers biting the proverbial bullet in anticipation of rate cuts down the road. However, recent increases in the federal government’s capital gains tax have hampered sales of smaller residential apartment buildings in recent weeks, with many owners choosing to hold back on selling their properties at the higher tax rate. All asset classes are expected to be affected, eventually placing greater upward pressure on values in an already tight marketplace.