! CREF Fall 2014 2014-10-01 10:46 PM Page 28
THE FORCES OF CHANGE
Greg Rogers Executive Vice President, Minto Properties Inc.
Three forces are currently acting on the Ottawa market. The first, in the form of federal government cutbacks, has caused employment to fall, which in turn has reduced spending and home buying. The next force is positive: capital spending on major projects, including transit, Lansdowne Park and the Bank of Canada renovations contract. “A lot of very major capital projects are offsetting some employment declines, and especially the chill through the government sector, with an abundance of construction related jobs,” says Greg Rogers, Executive Vice President of Minto Properties Inc. The third force, also positive, is Ottawa’s gradual transformation into a new kind of city. “The urbanization of Ottawa is gaining strength, as is its attractiveness as an alternative to big cities in a technology age,” Rogers says. Using Toronto as a leading indicator, he explains that while two-thirds of residential development was once in the
BALANCING GOVERNMENT AND BUSINESS IN THE CAPITAL
Todd Bechard Executive Vice President of Acquisitions, Cominar REIT
Investing in Ottawa, where the federal government occupies one-third of the office space, requires caution. Real estate investors must have a solid understanding of how the growth and decline of government office space affects the market. According to Todd Bechard, Executive Vice President of Acquisitions for Cominar REIT, the way to obtain net rental rate increases in this climate is by controlling operating costs. He explains that over the last 15 years Ottawa’s office market has seen little increase in the net rental rates, but it has seen an increase in gross rental rates, as operating costs and property taxes have continued to rise. “Tenants always do their budgets based on gross rent analysis,” he says. “If you can keep control of operating costs, then there may be room to grow net rental rates.”
suburbs and one-third downtown, that ratio has almost completely reversed. Minto has responded to the shift by focusing more on the urban environment, with an increasing number of condos and mixeduse developments. Today, those developments tend to be built “up” rather than spread out. “Whereas we’re used to building 500-2000 unit communities horizontally over 10 years,” Rogers says, “now we’re doing the same thing vertically over five years.” To build vertically, he adds, it’s important to build a true community that includes retail, schools and other amenities that people would expect in a traditional, suburban development. “I think it’s smart growth because you don’t have to put out pipe and roads and disturb the environment for the sake of getting cars out to distant communities,” he says. “This, for us, is the future.” ■ Michelle Morra-Carlisle
On the industrial side, however, rents in the Ottawa market are already very high by Canadian standards (30% to 50% higher than in Toronto or Montreal) and unlikely to increase much more. The high rent is likely due to a scarcity and cost of available land for further industrial development. Bechard believes the Ottawa market can only reach its full potential with less reliance on the federal government. He would like to see government’s share of the office market reduced from 35% to 25%, not by government downsizing but by increasing non-government demand through economic growth. “It can’t just happen by government downsizing and vacating space,” he says. “You need to create private-sector economic activity that stimulates both the expansion of existing businesses and attracts new businesses to the market.” ■ Michelle Morra-Carlisle
28
Canadian Real Estate Forum / FALL 2014