The binders appear to be coming off the commercial property sector in Ottawa, industry observers say.

Pushed by a strong economy and an expanding public service during the past two years, non-residential real estate has posted its strongest results in nearly a decade. Rents have doubled in the past 18 months outside the downtown core; empty office space is filling throughout the city; and new construction downtown is trying to catch up with demand so strong that it's virtually impossible to find space larger than 20,000 square feet.

For many in the industry, however, this activity doesn't represent a boom. Rather, it's a result of latent demand that has pushed market-setting downtown rates to almost $26 per square foot, net.

"Ottawa never has a steep upward curve. It's always been slow and steady, pushed by a federal government that's playing musical buildings. There hasn't been a ton of private-sector expansion. The financial boys are too leery for that," says David Chorney, managing director of real estate analysts Colliers International in Ottawa.

Ashley Fraser, Business Edge
Colliers International's David Chorney has a bird's-eye view of new construction in Ottawa.

"That said, we are seeing competitive vacancy and strong uptake throughout the city. With the way the economy is strengthening, I don't see why this wouldn't continue for some time," he says.

There are six new A-class buildings downtown, representing 1.2 million sq. ft. of space that will be ready to take tenants between this fall and 2008. The federal government will likely lease the lion's share, but there is no lack of other tenants.

"Downtown still has one of the lowest vacancy rates (about three to four per cent). New space has either been preleased or is in demand. I can't see this changing anytime soon," says Bob Perkins, vice-president and managing director of CB Richard Ellis's office in Ottawa.

Amid the surge, the one question mark might have been Oxford Properties Group's Constitution Square Tower III on Albert Street - the only building without a major tenant when construction got under way last year.

But the veil lifted in February, when the Crown corporation International Development Research Centre agreed to take up to 40 per cent of the building's 350,000 sq. ft.

"There's been no indication from the new government that there will be any downsizing or moving out (of the core). This strength is in the hands of the bureaucracy," Perkins says.

This trend isn't new. It started in 2004, following the government-led recovery from the impact of the collapse in the technology market. As federal buildings aged, departments such as Public Works and Government Services went looking for new space to house an estimated 12-per-cent increase in staff since 2001.

Mark White, vice-president of leasing for property manager Colonnade Development, believes that other federal tenants also could shake things up.

"Everyone talks about Public Works, but if DND (Department of National Defence) decides to relocate, that could be the defining factor of the downtown core," he says. DND is currently in a 50,000-sq.-ft. building a short distance from Parliament Hill.

It underscores the tight supply that exists in the city's top market area. Most analysts think the unwillingness of financial institutions to gamble on new construction is hampering Ottawa's economy.

Chorney says there was $1.1 billion in commercial real estate transactions in 2005 and that it could have been as high as $3 billion "if there was product."

"I can see that growing this year because the economy is strong and people are starting to look seriously at viable alternatives," he adds.

New construction has had a huge knock-on effect throughout the rest of the city. Private uptake is being forced west, east and even south.

"The last 18 months have been really incredible. No one expected it to happen so quickly and this kind of growth means you go looking for the best deal," says Bruce Wolfgram, a vice-president with commercial real estate adviser JJ Barnicke Ltd.

One of those options is the new Adobe Systems' complex at the corner of Preston Street and Carling Avenue, about three kilometres from downtown. Despite the location, the building's 150,000 sq. ft. is being gobbled up by tenants who don't want to pay downtown rates.

The trend is even more pronounced 20 kilometres west of downtown in resurgent Kanata, Ottawa's high-tech centre and barometer of private-sector health.

There the vacancy rate has been halved in each of two straight years, and was down to about 11 per cent in early 2006, following the disastrous results of the capital flight from the technology sector.

In 2000, big companies such as Nokia took long-term leases on new buildings in a dozen new technology parks. After they were left paying the bills for years without earning revenue, they are tickled to find new tenants for space that is going for a net of about $11 per sq. ft.

"Kanata is the best deal in town. It's got the newest buildings and the best choices. The companies going in there are getting the early advantage, but this could change soon if smaller companies trigger expansion," Perkins says.

The upsurge is being driven mostly by new call centres for Dell and Convergys, along with some non-telecom suppliers. This is signalling the entire tech sector that things may have turned around for good and may "bring the startups out of the rec room," Wolfgram says.

"The tech sector drives other sectors and with what the feds are doing downtown, I think companies are starting to rethink where they have to be, especially when you have a choice about paying $25 (per sq. ft.) or $10," he says.

Another result of a growing and affluent population with confidence in the economy is the red-hot demand for retail and industrial space, both of which fight continual rezoning battles with the municipal government.

"The demand of a growing population is too great to ignore anymore. In the next 12 months Kanata will add 1.2-million sq. ft. alone and we're looking at five million to be added in the next three to six years," says Richard Getz, Colonnade's vice-president of retail.

This year will also see a new tenant, most likely the RCMP, take over most of the 910,000-sq.-ft. JDS Uniphase campus on Merivale Road, which is currently owned by Minto Developments.

"That deal will set the tone for the entire market this year and when it does you can expect some movement (within the private sector). Right now we're seeing lots of large tenants out there kicking tires," Colonnade Development's White says.

"Whether that translates in new business remains to be seen, but I expect to see (last year's) growth to continue at a greater pace this year," he says.

(Mike Levin can be reached at levin@businessedge.ca)