Commerical real estate firm cites “uninspiring” quarter with downsizing in the oil patch, suburban tenants picking up the slack, and tenants upgrading quality

Calgary’s downtown office market hit a “staggering” 27.2 per cent vacancy rate in the fourth quarter of 2019, according to a report by commercial real estate firm CBRE.

The company said it was another “uninspiring” quarter for the market “characterized by familiar trends: downsizing in the oil patch, suburban tenants picking up the slack, and tenants upgrading quality.”

CBRE said the downtown office market experienced 261,291 square feet of negative absorption in the final quarter of 2019, bringing the year-end results to a flat 19,512 square feet of net negative absorption. Absorption reflects the change in occupied space.

“This statistics belies the inherent softness remaining in the downtown market,” said the report.

“The first two quarters of 2019, the market absorbed over 400,000 square feet through a combination of sublease offerings being removed from the market, available space being converted to amenity space and the trend of co-working operators taking space. However, during the latter half of the year merger and acquisition activity and downsizing in the oil patch resulted in the creation of new significant sublease offerings. Notable examples in Q4 alone include Husky, Repsol and Nexen which freed up a combined total of 430,000 square feet in Class AA and A buildings.”

Underscoring the trend to flight-to-quality over the last 36 months, there has been over 1.5 million square feet of positive absorption in Class AA product while the remaining classes have accounted for more than 1.6 million square feet of negative absorption, explained CBRE.

“In order to combat this trend, Class A landlords specifically have begun major building upgrade programs including additions and upgrades to amenities, fitness facilities, conference centres, tenant lounges, retail providers and co-working facilities,” added the report.

“With few catalysts for growth on the horizon, we expect similar results for the Calgary downtown office market in 2020. CBRE remains optimistic that layoffs in the oil patch will decelerate but expect further merger and acquisition activity in the sector.”

Similarly, a report by Colliers International pegged the downtown office vacancy rate at 26.32 per cent, rising from 25.05 per cent in the third quarter of 2019.

“Though transaction velocity has slowed given recent market conditions, Calgary saw a multitude of deals over 20,000 square feet in the downtown office market in 2019 . . . This volume of sizeable transactions was partially driven by the flight to quality and creative transaction structures targeting balance sheet and/or income statement improvements, driven by new lease recognition rules and not by contractual expiries,” said Colliers.

“We expect similar trends to continue in 2020.”

It said the market saw a number of technology companies from both inside and outside of Calgary transact in the central business district in the fourth quarter of 2019.

Mario Toneguzzi is a business reporter in Calgary.

© Calgary’s Business


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