Hot downtown deals not enough to lure retailers wary of government whims

Ottawa's downtown core is still riddled with dozens of empty shops, and real estate brokers say it means deals for retailers just as public servants prepare to spend more time in the office.

But some prospective tenants remain skeptical of gambling on an area whose fortunes turn on the whims of a single employer.

Cheryl Kardish-Levitan, a commercial broker with CLV Realty, said she's never seen so many vacancies. The reasons are obvious: the legacy of COVID-19, public servants working from home, the impact of the convoy occupation. 

But she said landlords are beginning to offer more attractive terms for tenants — recognizing that downtown isn't often their first choice.

"They want to fill their spaces," she said. "They're sitting with empty units, and they have to cover the operating costs and taxes. I think their philosophy is something is better than nothing."

Candice Lerner-Fry, head of the retail leasing division at Marcus & Millichap, said landlords are "aggressively looking for retailers."

"They are willing to do deals that we would have never seen previous to COVID, or even after," she said.

Landlords dangling inducements

Jamie Boyce, a vice president at CBRE Canada who works in the Ottawa office, said the broader Ottawa market for retail space is firing on all cylinders.

But the relative lack of government employees means it's still a challenge getting retailers to look at downtown options. According to Boyce, they simply aren't confident the sales will be there. 

He's seen landlords "more willing to roll their sleeves up and be creative" downtown, compared to elsewhere in Ottawa.

That doesn't necessarily mean big rent cuts, though Lerner-Fry said she's seen significant moves in that direction in some of her deals. Boyce said rents have remained fairly stable in the downtown core, at about $30 to $50 per square foot, depending on the building, though some spaces, like food courts, can be considerably more. 

He said the real advantage for tenants comes from "inducements," like a period of free rent or an agreement to accept a percentage of sales as rent.

Kardish-Levitan said she's seen landlords willing to offer a year of free base rent.

"You have to do that. You have to kickstart and give the tenant some incentive, whether it's free rents or leaseholds, an allowance, to get them in there to open the doors," she said. 

Downtown spaces still 'feel riskier'

With deals like that, what's keeping tenants from jumping into those spaces? 

Lauren Power has spent the past two years looking for a new location for her restaurant, Red Door Provisions, after it outgrew the "little sardine can of a space" she's now using on Beechwood Avenue. 

She's looked at about 40 locations over the past year, most of them downtown, but she doesn't feel like landlords are willing to be quite so generous as the real estate agents insist.

Power said rents remain expensive and any inducements aren't enough in light of the high costs of setting up — especially in aging downtown buildings.

"I think a lot of landlords assume that if they just wait long enough, somebody will eventually pay that price tag," she said.

"Most of these spaces are quite lived-in and well loved," she added. "But what that also means is that that's a bigger bill for us going into it and modifying the space."

Jessica Carpinone is co-owner of Bread By Us, which also outgrew its space in Hintonburg. She's been searching for a new location for a year and called it "a really big slog."

Rents in her preferred neighbourhoods are high. So what about all those empty downtown storefronts?

"I don't want to say never," she said. "I really have had to keep a more open mind. But I think because we are still trying to have a really significant retail presence, it's really important for us to be embedded in a neighborhood that has a lot of foot traffic and where there's a really loyal customer base."

She isn't sure downtown, with its overdependence on daytime office work from public servants, offers that. The inducements she's seeing aren't enough to overcome that fact.

"We are really thinking about five to 10 years down the road and it's really hard to say what the downtown core will look like. And I don't have deep pockets to kind of take a chance," she said.

"I think we as a business just have to be really cautious and make sure that there's a long-term residential presence or a workforce that's very reliable."

Power feels exactly the same way. In her view, the pandemic proved how shaky the downtown economy can be.

"Those spaces feel riskier to me," she said. 

Broker says federal government ready to make deals on retail space

Carpinone feels like the federal government could do more to support downtown business. She doesn't mean sending public servants back to the office for more days — but leveraging the federal real estate portfolio to create a more vibrant neighbourhood.

The federal government owns a long list of properties with vacant storefronts. Some, like Esplanade Laurier and the Jackson Building, are on the disposal list for possible sale, while several more line Sparks Street. 

Carpinone said the federal government doesn't need to sit on empty spaces, and might be better off leasing them at discounted rates. 

"They don't have to operate with the same kind of ruthless business mindedness that a lot of landlords are compelled to operate under," she said. "So I think they could set a really good example of what happens when you invest in your tenants' success."

Public Services and Procurement Canada (PSPC) said the current vacancy rate for retail spaces available to non federal tenants in its buildings is four per cent in the National Capital Region, with the average time of vacancy in Ottawa about 12 to 36 months.

PSPC said it's subject to Treasury Board rules that ensure rental rates "must be justified in relation to the market value."

Nontheless, Kardish-Levitan said she's seeing a lot more commitment from the federal government to fill up those spaces.

"You just bring us your clients and we'll work a deal and we'll pay commissions," she said, summarizing the federal stance at a recent event. "That was the first time in a very long time that they did that. So that's very promising and extremely encouraging."

Whatever today's challenges, Boyce said the trends for downtown are looking positive, whether from traffic counts or mobile heat map analysis. He's seeing the numbers creep up one month after another.

Kardish-Levitan said an extra day of work for public servants next month should make a major difference, and Lerner-Fry suspects that today's deals might not be available for long.

"I would say in about a year from now, the downtown core is going to be very active again," she said.