Calgary downtown office market continues slumping direction

 It is no longer news that Calgary's downtown office market is seeing record levels of vacancy this year due to the slumping economy caused by continued low prices for oil.

But a new report by commercial real estate firm Cresa sheds some new light on the city's current vacancy rate compared with other North American cities that have gone through tough economic downturn in recent times - the Bay Area (San Francisco and Silicon Valley) following the tech burst in 2003, New York after the financial crisis in 2009 and Detroit following the financial crisis and subsequent automotive bailout in 2009.

Cresa says the following is where the vacancy rate in each of these markets topped out during their respective downturns:

New York (2009) 14.0%

San Francisco (2003) 20.7%

Calgary (Current) 21.6%

Detroit (2009) 22.0%

Silicon Valley (2003) 26.6%

"While there are numerous differences in the above markets (New York really is in a league of its own), the Bay Area and Detroit markets do share one thing in common with Calgary – they can be very volatile due to their reliance on one major sector. The supply and demand imbalance will likely widen through the remainder of the year if demand remains weak and isolated to organic lease expiries or select companies making acquisitions and consolidating their staff," says Cresa's Q2 downtown office market report. 

"Strong tenants in the market are the prettiest girl at the dance and being courted by landlords and sublandlords alike through aggressive rental rates and inducement packages.

"Given the recent string of corporate acquisitions in the energy sector, continuing layoffs, decreasing company footprints, and all too common although extreme circumstances companies entering into CCAA protection or going bankrupt, it all leads to the same outcome – more empty office space."

Cresa says it is possible Calgary eclipses the negative absorption experienced in 2015, setting a new record for the amount of space returned to market in one year and take vacancy into the 24-25% zone by the end of the year.

It is hovering at close to 22% right now.

"Heading into 2017 we will see two new developments come “on stream” through the delivery of Brookfield Place (1.4MM square feet; 81% leased to Cenovus and Scotiabank) and 707 Fifth (564,000 square feet; 58% leased to Brion Energy). The question that lingers with these groups who have entered into long-term transactions is, how much of this new space will they require given their respective footprints were based on long term staffing counts aligned with higher commodity pricing?," says the Cresa report.

"In 2018 Telus Sky, a mixed use complex (430,000 square feet of office space, 36% leased to Telus) will be delivered to market, which will be the final building delivered in this development cycle and perhaps for many, many years to come. Combining the surge of vacancy in existing buildings, with more to come through the remainder of the year, and the new developments (bringing with it headlease and likely sublease space as well) it all adds up to one thing - we have yet to hit bottom."

Barring a dramatic rebound in oil prices, Cresa says the best guess for hitting the bottom of the real estate market is mid 2017 when Calgary could have 10-12 million square feet of empty space.

"Calgary’s average annual absorption over the last 15 years is approximately 550,000 square feet. If vacancy gets to 12MM square feet, it is a 22-year supply of space, or a 14-year supply before we get back to what is considered an equilibrium market of 10% vacancy. To put the above in more layman’s terms, if you imagine the market is a clock and 6:00 is rock bottom, we think the current time is 4:30. Given the amount of supply, the problem is when we get to 6:00 the battery may very well run out of juice."