Lack of new capital in the oil and gas industry continues to limit growth in Calgary’s struggling downtown office market, says commercial real estate firm CBRE.
The company’s latest report says the Calgary downtown office market experienced 192,548 square feet of negative net absorption (the change in occupied space) in the third quarter. That follows two consecutive quarters of positive absorption driven primarily by co-working activity.
“As a result, the overall vacancy rate increased by 50 basis points (bps) to 26.6 per cent. Despite negative third quarter results and limited growth, the downtown market is on pace to record its first positive year since 2014 with 241,779 square feet of positive absorption year to date,” said CBRE.
“A large portion of the negative absorption came from an increase in merger and acquisition activity. CNRL’s acquisition of Devon Energy resulted in over 250,000 square feet of sublease space coming back to the market. A lack of capital in the oil and gas industry primarily due to pipeline constraints and lower prices for Canadian oil and gas continues to limit any potential growth in Calgary’s downtown core.”
The report said the Class AA market recorded negative net absorption of 128,996 square feet in the third quarter, marking the second consecutive quarter of contraction in prime office product.
“This was primarily due to the … available sublease space in the Devon Tower. Despite recording a 70 bps increase in the Class AA vacancy rate this quarter, flight-to-quality continues to account for a substantial portion of the market activity,” said CBRE. “A notable example included Secure Energy acquiring 110,000 square feet in Brookfield Place, in turn making their premises in Bow Valley Square available for sublease. Over the past 10 quarters, Class AA product has recorded over 1.6 million square feet of positive net absorption, averaging 160,000 square feet per quarter.
“In contrast, Class A, B and C product has suffered at the expense of the flight-to-quality trend. Over the last 10 quarters these classes have accounted for a combined 1.4 million square feet of negative net absorption. As a result, vacancy rates in these classes have increased to 24.8 per cent, 38.9 per cent, and 39.4 per cent, respectively while Class AA’s vacancy rate remains at a proportionately healthier level of 17.6 per cent. Unless there is an unforeseeable positive shift in the downtown leasing landscape, we expect flight-to-quality to continue to negatively impact lower class buildings, in particular Class B and C product, going forward.”
Mario Toneguzzi is a Troy Media business reporter based in Calgary.