James Bagnall - Yesterday
© Provided by Ottawa CitizenThe empty shells in the capital region's downtown core. Their fate hangs in the return of government employees.
Since the beginning of the pandemic the capital region’s office market has verged on bizarre. Most tenants sent their workers home and continued paying for largely unused real estate.
The result is that office space is still more than 90 per cent leased, one of the best such ratios in the country. Yet, it has the feel of a conjuring trick.
Yes, landlords are getting paid but for how long?
The underlying assumption has long been that employees would eventually return to the office, and that working remotely full-time was an anomaly caused by the unpredictable trajectory of the coronavirus. But now, with so many people socializing in restaurants and bars in their free time despite the prevalence of COVID-19, returning to the office appears less a matter of public safety and more like resistance to resuming pre-pandemic work patterns.
The longer the delay, the more entrenched working from home becomes, with potentially profound knock-on effects throughout the local economy, but especially in the downtown core.
“If you had asked me anytime during the past two years when I thought office work would resume, I’d have got it wrong every time,” said Martin Vandewouw, president of KRP Properties, which services more than three million square feet of office space in Kanata’s tech park.
Martin Vandewouw, president of KRP Properties, says it’s very difficult to predict when workers will return en masse to offices in the National Capital Region. LinkedIn photo
Vandewouw convinced his own complement of nearly 30 inside workers to return to KRP’s office towers last autumn, arguing that since KRP is in the business of providing real estate services to office workers, then “we had better walk the walk,” he said.
The timing of the great return for everyone else — if it happens — has acquired special resonance in the capital region. No other urban area in the country has embraced remote work with as much enthusiasm, leading many to assume to it’s become a permanent feature of our economy.
In the balance is the credibility of the city’s long-term plan to accommodate population growth, which assumes people will want to live in dense corridors along transit lines. The fate of the transit system itself is also at stake, along with hundreds of downtown businesses. Despite a re-opening economy, restaurants and retailers are still bleeding cash, waiting impatiently for businesses and dozens of federal departments and agencies to decide how they will deploy their talent on a permanent basis.
Other cities across the country are grappling with the impact of empty offices as well, but not to the same extent.
Statistics Canada estimated in May that nearly half the region’s workforce continued to work from home — 46 per cent in Ottawa and nearly 40 per cent in Gatineau. The same survey showed that elsewhere in the country, the work-from-home contingent was less than 28 per cent of the workforce.
The popularity of remote work is mirrored in the makeup of each city’s workforce. Urban areas heavily populated with government employees, white-collar professionals and financial specialists tended to have relatively more home offices. In Ottawa and Gatineau alike these three sectors make up nearly 40 per cent of the total workforce — by far the highest such ratio in the country. Only Quebec City, with a ratio of 31 per cent, came close.
And, for the most part, this doesn’t include high-tech, which accounts for more than eight per cent of Ottawa’s workforce, the highest such ratio in the country. (In Gatineau, it’s just two per cent).
Tech workers are returning, albeit methodically. Across Kanata, an estimated 20 to 25 per cent of the parking spaces are occupied on any given day. Though the ratio is rising, tech giants are anxious for faster progress. Ciena — the optical networking specialist that employs more than 1,700 locally — recently hosted a charity barbecue at its Kanata campus, attended by 80 per cent of its workforce. More than half the company’s employees are now commuting to work on a regular basis, on full-time or hybrid schedules.
Likewise, communications equipment leviathan Nokia recently unveiled plans to remake its Kanata campus. The working assumption is that the new buildings will be 80 per cent occupied throughout the week.
Kinaxis, the supply chain software company with 700 local employees, held an open house June 2 to showcase its new global headquarters in the Kanata West Business Park. The company also invited 30 of its nearly 700 globally-based workers. The move follows a two-month ‘soft opening’ during which Ottawa area employees were invited to simply show up and get comfortable with in-office work again.
© Julie Oliver
Kinaxis held a global open house for its new headquarters June 2. More than 70 per cent of the employees have started to work there at least three days a week.
“We’ve tried to make the office a magnet for employees,” said chief human resources office Megan Paterson, pointing to enticements such as spacious, flexible work areas, and fully-staffed gym and kitchen featuring healthy foods prepared by the former chef at Shopify, which closed its downtown offices in 2020.
Employees were recently surveyed about their working preferences. Paterson said 65 per cent chose a flex arrangement involving three days a week in the office. Thirty per cent opted for the full-time work-at-home option and five per cent said they would prefer to work full-time at the new headquarters.
That last number surprised Paterson. “We’ll give it another six or seven months and see how it changes.” Even so, Kinaxis is beginning its back-to-the-office regime with a considerable core connected to the office.
Yet, significant as these developments are, they represent a small fraction of the region’s total office space. The federal government’s dozens of departments and agencies occupy the lion’s share, more than half of it located in the city core.
Unfortunately for many downtown merchants, this part of the market is moving very deliberately towards pre-pandemic patterns.
Stéphan Déry, the official in charge of the federal government’s massive property portfolio, started his new assignment just a few months before the pandemic struck. Sometimes it feels as though he’s been at it forever.
The former CEO of the government’s Translation Bureau, Déry has been consulting with his counterparts around the globe, searching for the best way to accommodate nearly 320,000 federal government employees, including 125,000 in the capital region. An estimated 90,000 are office workers.
Since the government has left it up to individual departments and agencies to determine how employees should return to the office, Déry’s role is limited to getting those offices ready for whatever the new normal turns out to be. Nevertheless, the job has given him good insight into how this might play out.
“Post-pandemic our planning assumption is that the attendance rate will be 50 per cent,” he said in a conversation last year with his British counterpart, Steven Boyd. “Pre-pandemic we typically assumed an attendance rate of 66 per cent.”
A follow-up query to Pubic Services and Procurement Canada — Déry’s department — clarified that the actual attendance rate was between 60 per cent and 65 per cent.
This meant that on any given day pre-COVID, fewer than two of every three office employees were physically present in federal buildings. The rest were on training, visiting clients, on holiday or working remotely. While many large private-sector employers also permit white collar workers latitude when it comes to office attendance, the difference in the public sector is that it’s all very codified, courtesy of detailed collective agreements.
The 50 per cent target is based on surveys of government employees who said they expected eventually to work three days a week from home on average. Fully 85 per cent expressed a desire to work remotely at least part of the time. Government unions, who represent the vast majority of the government’s workers, will do their best to make this a reality.
If they succeed, the government will be paying for too much real estate, as Déry acknowledged. “Many of our old offices were scaled on an assumption that 100 per cent of people might be in the office only one day,” he said, “which clearly meant that they’re oversized.”
Any pruning of the government’s office portfolio has potentially serious ramifications for the local economy. The federal government accounts for 39 million square feet of office space in the capital region, about 16 million square feet of it leased. In Ottawa alone, the leased portion accounts for about 30 per cent of the total market, calculates Warren Wilkinson, the managing director of Colliers, a real estate consulting firm.
“We’ve tried to make the office a magnet for employees,” said chief human resources office Megan Paterson, pointing to enticements such as spacious, flexible work areas, and fully-staffed gym and kitchen featuring healthy foods prepared by the former chef at Shopify, which closed its downtown offices in 2020.
Employees were recently surveyed about their working preferences. Paterson said 65 per cent chose a flex arrangement involving three days a week in the office. Thirty per cent opted for the full-time work-at-home option and five per cent said they would prefer to work full-time at the new headquarters.
That last number surprised Paterson. “We’ll give it another six or seven months and see how it changes.” Even so, Kinaxis is beginning its back-to-the-office regime with a considerable core connected to the office.
Yet, significant as these developments are, they represent a small fraction of the region’s total office space. The federal government’s dozens of departments and agencies occupy the lion’s share, more than half of it located in the city core.
Unfortunately for many downtown merchants, this part of the market is moving very deliberately towards pre-pandemic patterns.
**
Stéphan Déry, the official in charge of the federal government’s massive property portfolio, started his new assignment just a few months before the pandemic struck. Sometimes it feels as though he’s been at it forever.
The former CEO of the government’s Translation Bureau, Déry has been consulting with his counterparts around the globe, searching for the best way to accommodate nearly 320,000 federal government employees, including 125,000 in the capital region. An estimated 90,000 are office workers.
Since the government has left it up to individual departments and agencies to determine how employees should return to the office, Déry’s role is limited to getting those offices ready for whatever the new normal turns out to be. Nevertheless, the job has given him good insight into how this might play out.
“Post-pandemic our planning assumption is that the attendance rate will be 50 per cent,” he said in a conversation last year with his British counterpart, Steven Boyd. “Pre-pandemic we typically assumed an attendance rate of 66 per cent.”
A follow-up query to Pubic Services and Procurement Canada — Déry’s department — clarified that the actual attendance rate was between 60 per cent and 65 per cent.
This meant that on any given day pre-COVID, fewer than two of every three office employees were physically present in federal buildings. The rest were on training, visiting clients, on holiday or working remotely. While many large private-sector employers also permit white collar workers latitude when it comes to office attendance, the difference in the public sector is that it’s all very codified, courtesy of detailed collective agreements.
If they succeed, the government will be paying for too much real estate, as Déry acknowledged. “Many of our old offices were scaled on an assumption that 100 per cent of people might be in the office only one day,” he said, “which clearly meant that they’re oversized.”
Any pruning of the government’s office portfolio has potentially serious ramifications for the local economy. The federal government accounts for 39 million square feet of office space in the capital region, about 16 million square feet of it leased. In Ottawa alone, the leased portion accounts for about 30 per cent of the total market, calculates Warren Wilkinson, the managing director of Colliers, a real estate consulting firm.
The impact of a government pullback will depend on multiple factors.
The first is the strength of the shift away from assigning dedicated spaces for each employee: The government for years has been experimenting with setups that require employees to book space before they come into the office, or work in more open areas. If workers do become wedded to a mostly remote way of doing their jobs, they will almost certainly become less attached to their office real estate.
Canada Revenue Agency, which occupies 2.2 million square feet in Ottawa and Gatineau, has adopted a policy of unassigned seating for the vast majority of its 12,500 locally-based employees. The agency, the largest federal employer locally, expects it will no longer need that much space. For the moment, some 400 CRA employees in the capital region are commuting to the office. While the agency expects this number to climb considerably, it will almost certainly not reach pre-pandemic levels. Similarly, just four per cent of employees and Public Services are at present working full-time in the office.
Federal departments are also mulling the idea of shifting Ottawa or Gatineau-based employees into regional ‘hubs’ equipped with remote networking technologies. One reason is to reap savings by relocating to smaller and less expensive cities. Another is to take advantage of talent that exists outside the National Capital Region, which accounts for 42 per cent of federal government employment.
“Maybe post-pandemic people will start thinking ‘Well, why do we need to be in Ottawa to progress to the highest level within government?” Déry asked rhetorically.
CRA acknowledged that a very high percentage of its headquarters or corporate staff is based in the capital region while operations employees — those who process tax returns for instance — are scattered across the country. However, the agency is re-examining how it recruits senior talent. “The move to virtual work has increased the number of headquarters positions available to talent outside the National Capital Region,” said CRA spokesperson Chantal Beaudry, adding “it makes it easier to ensure that CRA has a diverse workforce.”
The Ontario government also examining de-centralizing its workforce. In their most recent budget, the Progressive Conservatives committed to using remote technology to distribute public services jobs across the province. It’s being billed as a way of helping to “reduce transportation congestion, contribute to environmental conservation and reduce future real estate costs.”
The province, like the federal government, is testing the use of regional office hubs in smaller cities.
A related consideration involves policy. While major federal departments and agencies such as Canada Revenue Agency, Employment and the military have long supported operations scattered across the country, the workforces of other organizations are concentrated overwhelmingly in the capital region. The latter include Finance, Innovation, Health, Statistics Canada and Treasury Board — each of which maintains at least 80 per cent of its employees in Ottawa-Gatineau. The obvious danger is that policies are developed in the capital region bubble — when government workers have already been travelling less thanks to the pandemic.
There will of course be pushback at headquarters over the potential loss of senior jobs to outlying areas. Nevertheless, the risk to the region’s economic core of a shrinking federal government presence is real.
One development that could offset the risk is the potential conversion of government offices into apartments or condominiums. Déry’s department has plenty of flexibility. Nearly 40 per cent of the office space it has secured in the capital region is in the form of leases. As these expire, the government could simply walk away, leaving it to private developers to remake parts of the core.
This won’t happen automatically, because conversions such as this are very expensive. Consider that Minto Apartment REIT in the first quarter this year spent roughly $50,000 just to upgrade each of certain apartments. Now look at the work involved in transforming a federal government tower. Depending on the floor layout, a developer would have to redo electrical, plumbing, air conditioning and other major systems. Costs would run easily into hundreds of thousands of dollars per apartment.
Still, it can be done, and profitably, assuming there’s a market for downtown apartments despite fewer government jobs. Certainly the addition of a permanent community of residents would help to enliven the city’s core.
That development would make the City of Ottawa very happy.
**
City councillors last autumn approved its latest long-term development plan, which assumes Ottawa’s population will climb 400,000 to 1.4 million by 2046. The overarching goal is to increase the share of new housing to 60 per cent in areas that are already built up and well-serviced with water, sewer and other amenities. The plan still requires the okay of the Ontario government.
The biggest population growth between 2016 and 2021 occurred in four areas that happen to house large communities of federal government workers — Aylmer, Barrhaven, Kanata and Orléans. While some of the land is classified as ‘built up,” the peripheries of each of these communities have been hives of new home and apartment construction for years.
The city’s plan predicts these areas will essentially be fully built by 2045 and there is resistance within council — including from Somerset Ward councillor and mayoral candidate Catherine McKenney — to the idea of further expanding the city’s perimeter to include more vacant land for expansion.
Regardless of the result of that particular battle, the big question is whether those government workers from suburbia will ever want to resume their commutes to downtown office towers. The answer is unknowable.
Long-term planning must be done, but COVID has taught us humility. So much can change.
The city plan’s assumptions — based on a return to near normal downtown and the popularity of living there — may well prove right in the end. But getting there will depend in a significant way on where government office employees decide to do their work in a post-pandemic economy.
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