Insight

Nortel campus hits the auction block

Attention turns to federal government's interest in 2.35-million-square foot campus

April 15, 2010
Listings for the 2.35-million-square-foot campus – roughly four times the amount of office space that's inside the World Exchange Plaza – were published this week by BMO Capital Markets and brokerage firm DTZ Barnicke.

"It is the biggest real estate story in Ottawa today, without a question," says Greg Clark, managing director at commercial real estate services firm CB Richard Ellis.

He says all eyes are now on the federal government, which will dramatically influence the future of the west-end complex.

Even before Nortel filed for bankruptcy protection in early 2009, speculation was rife in the local real estate industry that Public Works would lease or buy the property as the department deals with a looming space crunch as it vacates several office buildings that are in need of significant renovations.

If the federal government opted to sign a lease with Nortel prior to the sale, it would attach a guaranteed income stream to the property and significantly increase its value.

The stability associated with a government tenancy would likely attract the interest of pension funds and other institutional investors in the property.

The federal government is well aware of the office leasing opportunities inside the Carling Avenue campus.

In January 2009, Nortel submitted space in the campus in response to a request for information on the availability of local office space published by Public Works. At the time, the federal government was looking at occupying space garnered through the RFI sometime in 2011.

Darren Fleming, a managing partner at brokerage firm CresaPartners, says the campus could be worth anywhere between $150 million and $300 million, depending on how much space is leased, and at what rates, at the time of the sale. If the property was sold fully leased to the federal government, it could be worth much more, he adds.

“If Nortel wants to get the highest and best price, they need to have a secured income stream coming out of the asset," he says.

If the property is sold without government leases in place, Mr. Fleming predicts Minto could be an interested buyer. The company purchased the 910,000-square-foot JDS Uniphase campus in 2005 for $28 million. The property sat empty for a year before Minto finalized a 25-year lease with the federal government for the RCMP.

Back on Carling Avenue, it's not immediately clear how much of the property is currently vacant.

Prior to filing for bankruptcy, Nortel was only using about half the space in the campus. Three purchasers of Nortel's business units – Ericsson, Avaya and Ciena – reportedly currently occupy three of the 10 laboratories on the campus with fewer than 4,000 employees.

In a U.S. Securities and Exchange Commission filing, Ciena says it signed a 10-year lease for 265,000 square feet in Lab 10 at $7.2 million annually, including both base rent and operating expenses.

That works out to roughly $27 a square foot. While office space in Kanata averages a gross rate of roughly $22 to $25 a square foot, the optical labs at the Carling Avenue campus require more electricity and maintenance, leading to higher operating costs, says Mr. Fleming.

“(Ciena) did pretty well," he says.

The lease agreement started last month and cannot be terminated until September 2012 at the earliest. After that, the landlord can terminate the lease if the property is sold by giving Ciena 30 months notice and paying it US$33.5 million, the filing states.

“That clause is what is keeping this (option) open for the federal government," says Mr. Fleming.

“Now the race is on."