Managers of the federal government’s massive real-estate portfolio have again fallen short of their performance targets, says an internal report.
Vacancy rates remained stubbornly high, maintenance costs rose significantly and the government’s return on investment was anemic — raising questions about the business savvy of federal bureaucrats.
The findings are contained in Public Works’ so-called Asset Report Card for 2008-2009, a draft copy of which was obtained by The Canadian Press under the Access to Information Act.
The document is an annual accounting of how efficiently the government manages the 353 buildings it owns across the country, including 233 Crown-owned office buildings. Most of the offices are in the Ottawa area.
Public Works’ real property branch was restructured in 2007 to more closely align real-estate operations with those of commercial landlords.
The new report shows the average vacancy rate in federal office buildings was 4.6 per cent — an improvement of half a point from the previous year but still far from the target of 3.5 per cent or less.
Operating and maintenance costs rose in 2008-2009 by seven per cent, and now sit about 15 per cent above similar costs in the private sector.
Bureaucrats missed their targets for return on investment, which compares net income with the market value of the office properties. The goal is a return of between five per cent and eight per cent, but the report shows the portfolio came in at 4.8 per cent in 2008-2009.
Investment returns have been in general decline for the last decade, but there’s been a modest reversal since 2007 as the number has risen slowly, by half a percentage point in 2008-2009.
However, the most recent returns were artificially inflated by a sharp drop in the value of Ottawa’s office buildings in 2008-2009.
The report says the global meltdown that year shaved almost $400 million from the market price of the holdings, bringing the total value down to $3.3 billion — a drop of more than 10 per cent.
The estimated market value of the buildings can have a real financial impact as Ottawa regularly reviews whether to sell structures and lease them back. Public Works did just that in October 2007 when it sold seven prime office buildings to Larco Investments Ltd.
In addition to self-imposed performance standards, Public Works also uses data compiled by a private group — the Canadian arm of the Building Owners and Managers Association, or BOMA — to compare its performance with commercial landlords in the non-government sector.
The comparisons are fraught with problems. Public Works’ office buildings are on average 49 years old, for example, compared with just 18 years in BOMA’s Canadian survey. The older federal buildings can be more costly to repair and maintain. Public Works must also adhere to federal green policies, among others, that don’t apply in the commercial sector.
Still, the 2009 statistics show that the innate stability of government tenants gave Public Works a leg up even as private-sector landlords were hammered by the recession.
Vacancy rates in the BOMA survey soared to 12.2 per cent, “a high water mark for the Canadian private sector,” the report says. The soaring vacancy rate was likely responsible for a “massive decrease” in leasing revenues for private landlords.
A spokeswoman for Public Works says vacancy rates have improved dramatically since the report was written.
Last month, for example, the rate was less than one per cent in the Ottawa area and was 2.2 per cent nationally, Tricia Van der Grient said in an email response to questions.
“This is low given that during the calendar years 2012 to 2014, we anticipate requiring over 400,000 square metres of additional office space to replace aging assets in our portfolio.”
Van der Grient cautioned that Public Works has to juggle many balls in managing its buildings and leases.
“Real estate is a dynamic industry where there can be large fluctuations in lease rates, purchase prices and vacancy rates over relatively short periods of time,” she said.
“Add to that ever-changing environment the fluctuations Public Works must respond to when providing office accommodation to departments dealing with unforeseen situations like H1N1, threats to national security and the need for job creation.”
Later this year the department plans to publish for the first time a summary of the performance of its real-estate portfolio. It’s also looking for potential alternatives to the BOMA survey that would produce more “meaningful” results, Van der Grient said.
Altogether, the federal government owns $6.5 billion of property across Canada, and leases more than 2,000 sites. Public Works’ real property branch has about 3,600 employees.