Brookfield Place, currently under construction, is one of several towers that will be opening into downtown Calgary's uncertain commercial real estate market in the coming years. Image: Dialog

Downtown Calgary's glut of office space dims prospects for future projects

Over the last decade, cranes and construction sites have been seemingly permanent fixtures in Calgary’s growing core. Millions of square feet of office space have been constructed, keeping the cash rolling in and builders busy. But that’s all changing, and even though no one can say for sure, it looks like it could be a while before any new projects get off the ground.

According to Cresa Alberta, there’s more than 9.1 million square feet of office space available in the core plus another two or three million square feet of what’s called “ghost space”—space that companies aren’t using but also aren’t placing on the sublease market. Officially, the vacancy rate is around 22 per cent, but including the unknown amount of ghost space places the rate is closer to 26 or 27 per cent.

A quarter of the core is sitting empty.

“The amount of ghost space is significant to the market because it belongs to those companies that are in the strongest position to grow when the commodity cycle rebounds, but in order for them to change the posted vacancy rate they need to fill all their ghost vacancy before they have any need to go to the secondary market,” says Adam Hayes, principal and broker, Cresa Alberta.

It all adds up to about a 15-year supply of space. However, Hayes points out that Calgary has seen years when the absorption rate has gone up from its average of 600,000 square feet a year to around two million square feet a year. The current glut doesn’t necessarily mean it will be 15 years before more development is required.

“It’s just that even if Calgary were to go on a bull run for say the next four or five years, it would take that amount of annual absorption to get vacancy back to pre-crash levels,” he explains.BrookfieldPlace PodiumCafe WEBBrookfield Place: 1.4 million square feet of office space. Scheduled for 2017 completion. Image: Dialog

More space to come

These numbers don’t include three towers yet to be completed. Manulife Financial Real Estate’s 707 Fifth Street project will add another 564,000 square feet and Brookfield Place will bring another 1.4 million square feet online when both are completed in 2017. In 2018, Telus Sky will add 430,000 square feet. That will likely be the end of cranes and construction for a while.

“Now until at least 2018-19, there will be very few groups with a risk threshold or the confidence in the Calgary market to put a shovel in the ground and build anything on spec, so I don’t think you’ll see any spec development in the next number of years downtown. Thereafter it is all market driven,” Hayes says. “We think everyone should get pretty comfortable with the way the skyline looks in 2018 because it may not change much in the near term.”

The three up-and-coming buildings have anchor tenants, but the lease agreements were entered into several years ago when companies were making real estate transactions based on a fairly aggressive growth cycle and corresponding staff counts. Today, growth plans have become contraction plans, and companies are subleasing space as their staffing counts dwindle. It will also be difficult to get new tenants willing to pay build-out costs when they can take advantage of recently completed improvements by simply moving into vacated space.

“In addition to the space that is yet to be leased, it’s likely that we are going to see some of the new development space come to market for sublease over the next couple of years, which will continue to buoy vacancy at relatively high levels,” Hayes says.telus skyTelus Sky: 430,000 square feet across of office space. Scheduled for 2018 completion. Image: Telus

Industry opportunities

According to Sandy McNair, data curator at Altus Data Solutions, companies in other Canadian cities have increasingly been looking to get into new space that allows them to better attract and retain talent while reducing occupancy costs per employee.

“That means that the number of workers in a building or on a floor will increase. The energy industry in Calgary has been quite generous with office space to date, with averages running around 300 square feet per person, some as high as 400. In other markets—Vancouver or Toronto—those numbers might be 200 all the way down to 100 square feet per person,” McNair says. “To do that, you need to be in better space that can accommodate this far more intense use.”

McNair believes that this will start happening in Calgary, placing additional pressure on the already soft market. But it could mean renovation opportunities for industry as companies begin looking to move into space that better meets their needs.

“In a more stable economy, most decision makers would rather not move. However, if the world is changing under your feet, it can be a significant opportunity to reconfigure and reimagine how you do business, who you do business with and where you do business from,” he says. “I suspect there will be a continuing quiet period and then it will get busier. We might not see incremental demand increases but a little more velocity and churn as tenants fit themselves into more appropriate spaces with strategies that align with their current approach to organizing their business and to succeeding in this new world.”

Industry might also want to invest in research and development to help building owners overcome a major challenge—upgrading their spaces. Because of the noise and dust inherent to the construction process, it’s difficult to renovate while keeping tenants, which will be essential in the current market.

“I think there is an opportunity for the owners, investors and the construction industry to figure out new techniques, work flows, technologies or strategies that will allow tenants to fall in love with a building and stay there for a long period of time,” McNair says.707 fifth street707 Fifth Street: 564,000 square feet of office space. Scheduled for 2017 completion. Image: Manulife Real Estate

Watch the numbers

Hayes says that a normalized market, where tenants and landlords have the same amount of leverage, has a vacancy rate of eight to 12 per cent. When vacancies are lower, rental rates start to rise to a point where new construction is justified. In the past, rental rates of $35–$45 per square foot or higher spurred development because tenants could move into new buildings for about the same amount of money it cost to be in existing buildings.

“That’s where you’ll start to see activity, with developers blowing the dust off their plans and thinking about the projects they’ve had on the shelf,” Hayes says.

 


 

How much space has been added?

Some big buildings have been added to Calgary’s skyline recently, but this isn’t actually the biggest commercial construction boom the city has seen.

According to Altus Data Solutions, 72 per cent of the office space in Calgary was built between 1979 and 1983 for a total of 25 million square feet in just five years. Between 2007 and 2017, 22.8 million square feet will have been added, which is 32 per cent of the total inventory in 11 years.

The most recent boom hasn’t had as dramatic an impact on the downtown core either. The early 1980s saw the construction of 64 per cent of total inventory in the core. In contrast, only 12.7 million square feet of the 22.8 million square feet of office space built between 2007 and 2017 was added to the city’s centre, making up 32 per cent of total inventory.


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