When the Bubble Burst: Lessons for COVID-19

Although the COVID-19 pandemic and its resulting economic impact were unforeseen, recessions are something you can bank on as an expected part of the business cycle. Acumen and prudence in these business contexts don’t just boil down to playing it safe, it requires an anticipatory approach built on lessons learned from the past.

To provide insight on our current situation, Real Strategy Advisors is returning to particular economic calamities of past decades to review what happened and how Ottawa’s commercial real estate market was affected so as to better predict where we might be heading. Last time, we honed in on the recession of the early 1990s. In this entry, we’ll explore the tech-focused turmoil of the early 2000s when the dot-com bubble burst.

In the two decades leading up to the new millennium, the information and communication technology, or ICT, sector had risen to a new position of salience. In the four years from 1997-2000, this sector went from contributing $33.8 billion to the domestic economy to $62.3 billion — that’s an increase of 84%! This growth rate far outpaced the rest of the economy, and although the situation didn’t really hit home for Canadians until 2001, the signs that this success was not sustainable were showing as the clock counted down towards Y2K.

Global markets that experienced record gains throughout 1999 saw them disappear over the course of 2000:

• The Dow Jones finished the year down more than 6%, its first yearly loss in a decade
• The more high-tech focused NASDAQ experienced its largest loss diving 39%
• The Toronto Stock Exchange lost $70 billion in value in a single day in October and companies like Nortel (more on that later) saw their shares plunge

Although Canada’s economy as a whole grew slightly in 2000, the value of the ICT sector plummeted over the course of 2001:

• Beginning in January, growth slowed in lots of economic sectors but the computer and telecommunications branch was particularly pronounced
• Between the lessened demand for ICT sector products and global changes spurred by 9/11, corporations announced massive layoffs
• From the peak in March to the trough in October, employment fell by 9% as a whole but dropped 36% in the communications equipment manufacturing portion of the ICT sector

Technically speaking, a recession is demarcated when all provinces across the country are in decline. Given the regionalism of Canada, recessions can also occur in specific provinces or areas due to the industries and other comprising economic variables. When it came to the dot-com crisis of the early 2000s, the country may not have unilaterally suffered but the tech sector, notablyOttawa’s “Silicon Valley North” and the office buildings that housed them, all took major hits.

In Ottawa, the later parts of the 1990s were less of a dot-com and more of a telecom boom. During the unprecedented rise, Ottawa was host to success story after success story with companies like JDS, Newbridge, and Nortel. More than $2 billion of venture capital found its way into Ottawa between 1998-2001. When the bubble burst however, and opportunities quickly disappeared over the course of 2001, thousands of employees at these too big to fail companies lost their jobs.

By 2003, the commercial real estate vacancy rate in Kanata, where most of the impacted technology companies resided, hit 30% as companies went bankrupt or significantly reduced in size. Rental rates plummeted and landlords were forced to offer significant cash inducements in order to attract tenants. Over the next five years, the idea of potentially moving to Kanata, where there was finished and furnished plug-and-play space was believed to be available at very affordable prices, loomed over every negotiation across the city.

We can’t discuss the Ottawa experience during this time, let alone the implication on commercial real estate, without touching on JDS and Nortel. Leading fiber-optic networking company JDS Uniphase employed 10,000 Ottawa workers at its peak in 2000. By 2003, as the industry crashed, there were less than 600 Ottawa employees — a steep decline to say the least. JDS Uniphase sold their Ottawa headquarters in Barrhaven to Minto for $28 million (a fraction of its original construction cost). A lease-to-own deal was later struck for the 900,000 SF plus campus with the federal government in 2006 and the Barrhaven offices now act as the home of the RCMP’s headquarters.

In 2000, Nortel’s workforce was about 16,000 (including employees and contractors) and the company acted as a wellspring for countless local businesses. Nortel was brought to near-death status over the course of 2001 and was never able to recover its titan-esque stature in the market. Nortel’s Kanata R&D campus touted as the “largest industrial high-tech campus of its kind in Canada” was finally put up for sale in April 2010 and was later acquired by the federal government to relocate its Department of National Defence headquarters. Their Skyline campus on Baseline Rd. and other buildings clustered around Baseline OC Transpo station are now occupied by public servants as well.

Clearly, if not for public sector growth offsetting the implosion of the tech sector during this time, the impact on Ottawa’s commercial real estate sector would’ve been significantly worse. Furthermore, the government is not likely to increase their demand for office space in the National Capital Region to help offset the spike in vacancy as they did in the 2000s.

Kanata-based landlords at the time were compelled to offer significant rental discounts and cash incentives to fill their vacancies. Real Strategy Advisors can only imagine that with the decrease in demand for office space being universal (as opposed to located primarily in Kanata) due to an expected increase in normalized remote-work, that landlords will once again have to make things enticing to keep or attract new tenants. Only this time, it will be the whole city.

Regardless of stark differences in causes, what is similar between the two cases is the unexpected nature with which the recession arrived. Because market conditions continue to develop alongside the pandemic, and we have no clear direction from the federal public service as to the timing and quantity of employees returning to their physical office space, we offer the following advice:

• Since the best market conditions are probably ahead of us, take advantage of opportunities that slow down your real estate procurement cycle.
• Don’t make the mistake of negotiating based on yesterday’s rates, and instead forecast the impact on your landlord 6-12 months from now.
• Keep your options open and your contracts flexible as new space is arriving on the market every week making the situation very dynamic.

Given the likely decrease in demand as we come to grips with what is the new normal in how the world uses office space, Real Strategy Advisors is certain that tenant-friendly opportunities (which we predict to last longer and deeper than the industry-specific crash of the 2000s) will be plentiful. Now is the time to have a real discussion — we can help — about how your company will be leveraging remote-work and how that will affect your total need for physical space. Companies that don’t take strategic action, might miss the deal of a lifetime!

For consultation and advice on your commercial real estate situation, workplace trends, and office safety regimens, please contact Real Strategy Advisors today.

Please click here to read Part 3: https://realstrategy.com/great-recession-lessons-covid-19/