With a vacancy rate of 25.06 per cent at the end of 2018, Calgary still has a major vacancy issue in its downtown office market and relief will not come until sustainable, believable confidence returns to the city, says commercial real estate firm Cresa.
In a year-end report, the company said market equilibrium, which is a 10 per cent vacancy rate, will be nearly impossible to achieve without some or all of the following: material job creation, major investment in the energy industry, and demolition or repurposing of office supply.
“Calgary requires almost 20,000 jobs to get back to a vacancy rate of 10 per cent. This is a staggering number and to get anywhere close to it, Calgary would need a full, sustainable recovery in order for capital to return to the market, leading to improved confidence, new projects and associated personnel,” said Cresa’s report.
“Despite moderate-to-high global energy prices through most of the last year, and several building redevelopments in the downtown core, vacancy still climbed higher in 2018. Though the city has made some strides recruiting new industries to Calgary – namely within the technology sector – those minor acquisitions cannot offset the bleeding from the energy industry. With workplace trends pushing more companies to utilize open space, and more employees working from home, it should only get more difficult to absorb vacancy in the downtown core.
“According to some, sentiment is at a peak negativity in the energy sector, which says a considerable amount, given what Calgary has been through in the last four years. This negativity is attributable to collapsing oil prices, coupled with pre-existing transportation issues – which created a significant discount for Western Canadian Select crude – and it simply sucked the life out of Alberta’s oil economy. Despite climbing gas prices on the NYMEX, AECO differentials hurt Canadian producers and the gas business was unable to help balance oil price deficiencies.”
Cresa said that at the risk of sounding alarmist, and after reviewing what has taken place over the past few years, it’s difficult to foresee any material recovery for Calgary’s downtown office market when looking at the next several years.
“While we have called for the stabilization of vacancy rates in the past – and are still doing so – we do not anticipate any positive absorption in the near term. While we keep looking for the bottom of the real estate market, it may have yet to be found,” added the report.
“For 2019, we are forecasting the downtown market to experience negative absorption to the tune of 350,000 square feet, which would increase vacancy approximately 0.75 per cent. Though the last inventory adjustment was made in Q4 of 2018, as Telus Sky was delivered to market, we still foresee further bleeding within the downtown core. Between active merger and acquisition activity, financial failures, and anticipated pockets of ghost space, we have line of sight to nearly 250,000 square feet reaching the market.
“Given general market sentiment and the likelihood of further energy industry consolidation this year, we anticipate vacancy will be higher come the end of 2019 than today. The next question to answer: will we find the bottom in 2019? Or, whether due to commodity prices, political shifts, pipeline announcements, or other macroeconomic events, will the current environment change again during the upcoming year? Given our short and long-term forecasts, it is certain we will remain in a tenant’s market for the foreseeable future.”
– Mario Toneguzzi for Calgary’s Business