Sublease surge adds to vacancies
Calgary’s office sector is experiencing déjà vu as plunging oil prices threatened to darken more office space in a city where a near record level of office construction is underway.
The downtown office vacancy rate has risen to 8.52 per cent, up from 7.7 per cent in the third quarter of 2014, according to Colliers International, but the vacancy rate could rise if more sublease space is pushed back onto the market.
The price of a barrel of Western Canada Select (WCS)– the benchmark for the Alberta oil sands – sank to $33 a barrel in early January, down 40 per cent from six months ago. West Texas Intermediate (WTI), the North American oil price benchmark, has shed 50 per cent of its value. The price drop has led to an outflow from premier office space in the city.
In the fourth quarter, approximately 330,000 more square feet of space was vacated than was leased in Calgary’s downtown, most of it in Class AA towers, which are now 6 per cent vacant, up from 4.7 per cent in the third quarter of 2014.
The current office market mirrors the downturn in 2008 when WTI values fell to $50 a barrel just as the 1.2 million-square-foot Bow tower was starting development. At that time, many pundits were predicting a prolonged office glut in the city, but Calgary bounced back to become Canada’s strongest office leasing market.
It could happen again, but the stakes are getting higher.
Calgary currently has about five million square feet of new offices under construction, including the 56-storey Brookfield Place that is expected to reach the market within two years.
The Canadian Association of Petroleum Producers had forecast that WCS production would reach 3.7 million barrels per day this year, up from 3.3 millions barrels per day in 2013, but that outlook may prove optimistic.
In the past few months, Statoil and Suncor announced oilsands cutbacks and, in January, Shell Canada said it would chop staff at its Albian Sands oilsands play near Fort McMurray. Calgary-based Precision Drilling Corp., one of Alberta’s largest oil drillers, said it would cut its 2015 spending by 45 per cent. Vermilion Energy Inc., Trilogy Energy Corp., Canadian Oil Sands and Texas-based Civeo Group, a workcamp builder, have also announced cuts to their anticipated spending this year.
