Major oil companies shoving excess space onto the market has nearly doubled Calgary’s downtown office vacancy rate and help notch four straight quarters of negative office leasing downtown.
During 2013, overall absorption was negative by 1.2 million square feet and sublease space now makes up nearly half the vacant offices.
“This is in large contrast from 2010 to 2012, where the office market averaged a stunning 3 million square feet of absorption per annum,” notes a report from Avison Young.
An overhang of more than 207,000 square feet of sublease space comes at a time when new office towers are ascending, including the tallest in Western Canada.
The 56-floor Brookfield Place Calgary east tower, which broke ground in December, will total 1.4 million square feet. Cenovus Energy will anchor the development with a one-million-square-foot commitment.
CBRE Ltd. pegs Calgary’s downtown office vacancy at 9.1 per cent, up from 5 per cent in the fourth quarter of 2012.
“The one single factor [for the rise in the vacancy rate] is the amount of sublease space coming onto the market,” said Greg Kwong, executive vice-president and regional managing director of CBRE in Calgary. “A good chunk of that was in the third and fourth quarters.”
The percentage of sublet space in the overall vacant space now represents 49.1 per cent of the market. Much of this is traced to oil and gas companies which took excessive space in anticipation of an expansion that never materialized, analysts say.
Avison Young, however, adds that the vacancy rate for Class AA space remains tight in forecasting a turnaround in the overall office sector. Only 0.3 per cent of prime Class AA space was vacant as of the third quarter of 2013, compared to 5.2 per cent of Class A space and nearly 8 per cent of Class B offices.
“There are still major corporations performing well,” Avison Young notes. “[and] these firms have an appetite for the best available space downtown.”
Analysts may recall the predictions of a glutted market three years ago as the Bow tower, currently the tallest building, began construction as Calgary’s office vacancy rate hit 10 per cent. Office leasing then went on to set record levels, including full takeup of the Bow.
With the recent spike in the vacancy rate, leasing prices have come down.
The average Class A net rent was $36.76 per square foot in the fourth quarter of 2013, which was down from $40.58 in the fourth quarter of 2012.
