Ottawa office vacancy fell downtown. Here's the catch.

The number fell. Almost none of it was leasing.

Colliers put out its second-quarter Ottawa numbers this week and the line everyone will repeat is that downtown office vacancy dropped to 12.4%, down from 13.5% at the end of March. More than a full point in ninety days, in the office market that has been the country's worst performer for most of five years.

Two things before anyone celebrates. A year ago that same number was 11.4%, so downtown is still worse off than it was in Q2 2025. And the bulk of the quarterly improvement came from arithmetic rather than from tenants signing leases.

The class C number gives it away

Downtown class C vacancy fell from 26.1% to 17.4% in a single quarter. That is an 8.7 point move in ninety days, on the oldest and hardest-to-lease product in the core.

Nothing leases that fast. Class C is the space that sits for two years while the asking rate gets cut twice. An 8.7 point improvement in one quarter is not a leasing story, it is a denominator story.

Here is what actually happened. Metcalfe Realty pulled two downtown towers off the office leasing market: 85 Albert, sixteen storeys and about 89,000 square feet, and 116 Albert, ten storeys and roughly 97,000 square feet. Both are being repositioned. Combined, that is 186,000 square feet of mostly lower-tier space that stopped counting.

When you remove a largely empty building from the inventory, you strip vacant square feet out of the numerator and total square feet out of the denominator at the same time. The vacancy rate falls without a single tenant moving in. Colliers' Ottawa lead, Warren Wilkinson, called the effect on class B and C an "artificial tightening," which is about as blunt as a brokerage gets in its own market report.

Real leasing did happen, and I do not want to talk it down. Downtown recorded 100,256 square feet of net absorption in the quarter, with class A responsible for roughly 71,000 of it. That is a decent quarter by recent standards. It just is not what moved the headline number.

Meanwhile the citywide figure went the other way

Ottawa's overall office vacancy rate rose in Q2, to 13.2% from 12.9%. Same report, opposite direction, same structural cause: buildings crossing the inventory line.

Colliers put two properties back into the office count that it had previously stripped out because they were slated for residential conversion. One is 495 Richmond Road, a seven-storey class A building of about 105,000 square feet that used to house the Canadian Institute for Health Information. The other is 1601 Telesat Court, 230,000 square feet on ten acres near Blair station, the former Telesat headquarters.

So downtown looked better, the city looked worse, and neither move was really about demand.

The part that actually matters: conversions are being un-planned

That second item is the real story in this report and it has not gotten enough attention.

For three years the consensus fix for Ottawa's office problem was conversion. Take the obsolete towers, turn them into apartments, shrink the office inventory and solve two problems at once. I went through the actual conversion math a few weeks ago and my conclusion was that it works on a narrow set of buildings and fails on most of them.

What has changed is the demand side. Public Services and Procurement Canada said this month that it is looking at leasing or buying more space in the National Capital Region to house the four-day return-to-office requirement. After five years of the federal government shedding space as fast as it could, the largest tenant in the city is signalling that it may need more.

Owners noticed. Regional Group has a conversion application in at the city for 495 Richmond and is still showing the building to office tenants. Devcore bought Telesat Court in 2024 for $16.1 million, announced rental towers and loft conversions, then hired a brokerage this year to go find office tenants instead.

Look at what Devcore paid. $16.1 million for 230,000 square feet is about $70 per square foot of building, with ten acres of residentially zoned land underneath it, minutes from an LRT station and a highway. At that basis you do not have to pick. Lease it as office, convert part of it, or redevelop the land, and the numbers survive all three. That is not a conversion play, it is an optionality play, and it is why a competing broker quoted in the same report called it one of the smartest Ottawa purchases of the past couple of years.

The lesson for anyone underwriting Ottawa office right now: the conversion thesis got priced when the federal government was shrinking. If the anchor tenant starts growing again, a repositioning that pencilled on 2025 assumptions is a different asset. Buy the basis, not the plan.

Kanata is where the leasing actually is

The most encouraging number in the quarter did not come from downtown at all. Tenants took more than 100,000 square feet in Kanata, led by Robotics Centre subleasing roughly 70,000 square feet at 365 March Road for a drone production facility. Kanata's availability rate, which counts sublease space alongside vacant space, fell nearly two full points to 14.2%.

That is a defence and advanced-manufacturing story tied to Ottawa's federal military spending commitments, and it is landing in the west end rather than the core. If you own or occupy in the tech park, watch it closely. If you are thinking about housing out that way for the people those jobs bring, browse Kanata.

What I would do with this

If you are a tenant with a renewal inside eighteen months. Nothing here changes your leverage yet. Downtown class B still sits at 15.8% vacancy, and class A vacancy rose to 10.8% from 9.3% a year ago while Constitution Square and Minto Place work through tenant departures. Negotiate as though it is a soft market, because it is.

If you own lower-tier downtown product. The window where "we are repositioning it" counts as a credible answer to a vacancy problem is finite. Build a plan that survives the federal government not taking your building.

If you are buying. Stop underwriting to a single exit. The last ninety days demonstrated that the classification of an Ottawa office building can flip twice in a year based on who is rumoured to need space.

One honest caveat

These are one brokerage's numbers on one quarter, and methodology is the entire point of this post. Colliers, CBRE and Avison Young each count Ottawa's inventory a little differently, which is why you will see the office vacancy rate quoted anywhere from roughly 12% to 14.5% depending on whose report is in your hand. Watch the direction and the absorption, not the decimal place.

Thinking through a lease renewal, a building purchase, or whether the office asset you own still has a plan behind it? I would rather look at your actual numbers than send you another market report. Call me at 613-262-6545 or email fil@613realtor.ca.