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Calgary’s office market not expected to recover anytime soon

"No net absorption is expected in 2017 and business investment will be relatively low ... continued upward pressure on vacancy is expected," according to Avison Young
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Calgary has the highest office vacancy rate in Canada, but the city has bounced back before – and some big investors are betting it will again. | Invest in Alberta


Calgary’s downtown office vacancy rate is at 27 per cent and could go as high as 30 per cent amidst warnings of a long-term bust. It recalls similar cautions a decade ago, just before Calgary went on a leasing tear that drove the vacancy level to 1.5 per cent, the lowest Canada had ever seen.

There are doubts, though, that history will repeat itself. 

There is now 9.8 million square feet of empty office space – the equivalent of nearly 225 acres – in downtown towers. 

Yet the real amount of vacant office space may already be higher than the numbers suggest, warns Avison Young. “Many large companies are not fully reporting their actual vacancies,” the real estate agency warned in a recent report.

“No net absorption is expected in 2017 and business investment will be relatively low. Furthermore, with almost four million square feet of new office space under construction, continued upward pressure on vacancy is expected,” Avison Young added. 

Cushman & Wakefield predicts the vacancy rate for downtown Calgary’s Class A buildings will hit 27.5 per cent by the end of 2017, the highest since the company began tracking numbers in 1985.

Canadian research director Stuart Barron said the estimation will likely be revised higher due to slowing demand and the addition of new buildings under construction.

The previous high Class A vacancy rate in the city was 17.3 per cent in 1992.

CBRE recently forecast that Calgary’s overall downtown office vacancy rate would peak at almost 27 per cent in 2018, after rising to nearly 25 per cent in 2017.

Cushman & Wakefield said Calgary was able to absorb the highest downtown office growth rate in Canada over the 15 years before the oil price crash, handling an average addition of 750,000 square feet per year.

However, it adds, the loss of 46,000 jobs in Alberta since oil prices fell mid-2014 has steadily emptied oil and gas head offices throughout Calgary’s core. It estimated that 4.3 million square feet of downtown space in all classes has been returned to the market over the past two years.

Calgary’s office market will not recover anytime soon, according to Alex Avery, managing director of institutional equity at CIBC World Markets

Any bounce back is predicated on a strong crude price recovery, something Avery believes is unlikely given a revolution in the energy extraction industry that has reversed a long-term decline in U.S. oil production. 

New technology in the form of horizontal fracking has driven extraction costs to US$55 a barrel in the U.S., undercutting the costs of production for Alberta oilsands operations, he noted.

“When you think about the biggest driver of growth in Alberta the last 10 or 15 years, it has clearly been oilsands investment. You can easily spend $15 billion on a new oilsands project, it can take eight or nine years and it employs thousands of people,” he told a recent meeting of the Commercial Real Estate Lenders Association in Toronto.

“There is an unlimited amount of shale oil [in the U.S.] available at somewhere around $50 or $60 a barrel, which is probably $25 to $35 a barrel cheaper than it is to develop through oilsands production. So the view at this point is it is very unlikely that we will see a new oilsands development kicked off in Alberta in probably 10 or 15 years, which is a big, big problem for the economy there.”

But Barclay Street argues there are also winners: Calgary tenants are being offered discounted lease rates because of the high sublease inventory, and long-play investors are being attracted because of “significant asset write downs.” 

Slate Properties, for example, bought a Calgary office portfolio from Dream Office Real Estate Investment Trust in the fourth quarter of 2016 for $300 million. The deal included six downtown towers,the Calgary agency said.

Barclay adds Calgary’s more affordable and accessible office sector is also attracting head offices, such as Dominion Diamond Corp., which is moving its corporate headquarters from Yellowknife.