The downtown Calgary office market is ending a difficult 2015 with a vacancy rate approaching 18 per cent.
Statistics from commercial real estate firm CBRE Limited indicate there was 7.1 million square feet of vacant space out of an inventory of just over 40 million square feet in the fourth quarter of this year — a vacancy rate of 17.6 per cent, up from 11.8 per cent in the first quarter of 2015 and from 9.8 per cent a year ago.
CBRE’s stats show vacant space is comprised of 3.8 million square feet of direct space and 3.2 million square feet of sublet space.
Calgary’s central business district also experienced a record year of negative absorption — the change in occupied space — with a negative 2.5 million square feet, surpassing the previous record for negative absorption of 1.625 million square feet in 2009.
Greg Kwong, CBRE’s regional managing director for Alberta, said the fourth quarter data is really not a surprise.
“We’re now effectively where we were in the 2009 recession,” he said. “A lot of that was obviously the worldwide recession but secondly there was a lot of supply brought on at that time. The interesting thing about right now is that some of the new buildings that are being built aren’t being delivered until the middle of next year or 2017. It’s a sublease supply issue (today).”
At the end of the year, there is just over three million square feet of office space construction in four buildings in downtown Calgary.
“Many companies considered Calgary in the past but found that both availability and pricing were a barrier. Now those same companies will find opportunities to invest in their Calgary presence. Looking historically, it is in the downturns that we see head offices make the move to our city to take advantage of the counter cyclical opportunities,” said Mary Moran, president and chief executive of Calgary Economic Development.
“When we see vacancy rates go up, often there is a flight to quality as companies move to more desirable locations. We are nurturing purposeful diversification in all quadrants of the city. But specifically looking at downtown, we are concerned and looking at a number of opportunities including a downtown office strategy to attract new head offices to Calgary and to attract satellite offices of knowledge-based companies in other higher cost jurisdictions that can take advantage of both our highly-skilled workforce and office availability.”
The downtown office market is seeing the fundamentals impact costs. In the fourth quarter of this year, the average quoted net rent was $19.44 per square foot with total gross rent at $39.67 per square foot, according to CBRE.
That has fallen from a year ago when the average quoted net rent was $26.40 and the total gross rent was $45.56.
Kwong said the situation in the downtown office market is entirely a reflection of the layoffs that have happened in the oil patch this past year.
“I’m hearing there’s going to be another round of layoffs coming in January and February of next year,” he said. “As far as the amount of sublease space on the market, we expect it to get a little bit higher in Q1 and then hopefully by this time next year we should be at least flatlining anyway and not going downhill.”