Calgary is already flirting with a 30 per cent vacancy rate in its downtown office towers, but the merger of two energy giants could push vacancies in key parts of the city ‘s core to nearly 50 per cent, according to a startling forecast from Avison Young.
“ It now appears that Calgary’s downtown will cross into unseen territory for a modern, major office market in Canada within the next 12-24 months – 30 per cent office vacancy,” states Avison Young’s Calgary Office Market Report Q4 2020, released January 25.
The scenario could even be worse, the real estate agency warns, noting that the recent merge of Cenovus Energy and Husky Energy has the potential of stripping another 600,000 square feet out of the central core at the western edge of downtown. If that happens, the vacancy rate in that sub-market could balloon to nearly 50 per cent.
Calgary-based Cenovus Energy completed its acquisition of Husky Energy on January 1, 2020, in an all-stock transaction valued at $23.6 billion, inclusive of debt.
“There are reports that Cenovus is planning to cut approximately 25 per cent of its post-merger 8,600 employees, most of which are expected to be located in Calgary,” Avison Young noted.
This would translate to approximately 2,150 people. With average office density ranging between 150 square feet to 250 square feet per employee, this would correlate to approximately 322,000 square feet to 537,000 square feet of space that will no longer be required, Avison Young estimates.
“Before entering the merger, Husky occupied approximately 600,000 square feet in the North tower of Western Canadian Place in the West End of downtown. Calgary’s downtown west end already has a significantly high vacancy versus the central core – 41.3 per cent vs 22.1 per cent. With the addition of a further 600,000 square feet of vacancy, West End vacancy would increase to around 47 per cent,” Avison Young’s report states.
The Cenovus cutbacks are part of a trend in the energy sector as the price of oil has remained low. Shell, British Petroleum, and Suncor have all announced layoffs over the last six months, which is expected to have a negative effect on Calgary’s top-tier office towers.
Calgary’s overall downtown office vacancy rate is now 26.9 per cent, the highest ever seen, as the total absorption – leased space versus space shoved back onto the market as subleases – went negative by 568,000 square feet in the fourth quarter of 2020.
Of the 170 office buildings downtown, four are completely empty and seven others have a vacancy greater than 75 per cent, according to Avison Young.
In all, there is an estimated 12.5 million square feet of vacant office space in downtown Calgary, 21 per cent of it in sublease space.
The high vacancies are affecting the price of the rare sales of Calgary office buildings. Of four major sales reported during 2020 in Calgary, all transacted for less than the assessed value.
An example is the sale of a 10-storey, 108,000 square-foot downtown office building that Teck Coal Ltd. sold in August 2020 in all-cash deal for $8.8 million, a price that corresponds to less than $75 per square foot, according to the Network, an Alberta real estate research firm.