Downtown office vacancies still a big Calgary problem

Falling values a tax issue for city coffers

After several tough years of seeing downtown office values in the city crumble like a sandcastle on the beach, 2020 was supposed to be the year the tide finally turned.

A nasty multi-year tax shift created by the declining value of Calgary's downtown towers appeared to be ending, city officials said in January.

Fast-forward nine months.

With a collapse in oil prices, a global pandemic and fewer people working, shopping or eating in the city's core, don't bet on stability returning to those valuations just yet.

“Year over year, downtown office and retail properties are certainly down. Now the question is how much,” said Kyle Fletcher, executive vice-president with real estate research firm Altus Group in Calgary.

That information will be coming out soon, but what is known so far isn't promising.

A new report from commercial real estate firm CBRE Canada found the downtown office vacancy rate in Calgary had climbed to 28.7 per cent during the third quarter, up from 27 per cent in the previous three months.

During the same period, average net rent for Class A office buildings fell by about nine per cent. Fewer companies and fewer jobs in the energy industry has meant less demand for office space.

“An office building, broad brush, is worth less today than it was a year ago,” said CBRE regional managing director Greg Kwong.

“We were actually on a bit of a recovery back in the first quarter … as it relates to office leasing and downtown building values. But then it just got shut down.”

These economic factors are affecting residential and business property values across the city as a deep recession hits the province.

ATB Financial released a report last week that projects the province's economy will contract by 7.1 per cent this year, before bouncing back by about 3.3 per cent each of the following two years.

All of these forces will also have a bearing on what happens next with the redistribution of municipal property taxes.

“Without question, values of commercial real estate are going down,” said Todd Throndson, Avison Young's managing director in Calgary.

After oil prices crashed in 2015, more than $14 billion of value in downtown office buildings vanished over a four-year period, pushing about $250 million of municipal taxes onto other commercial properties during the city's annual reassessment process.

While the tax load on downtown skyscrapers was reduced, thousands of commercial property owners — and business operators — outside the core saw steep increases.

Facing a tax revolt from businesses, council shifted more of the municipal tax burden to homeowners.

It has been a painful journey to this point. And it doesn't look like the ride is going to get any smoother.

The COVID-19 crisis has forced some small businesses to close this year. Oil prices remain low and unemployment is high.

More Calgarians are working from home and more people are shopping online.

Into this tempest comes the annual assessment process, based on property values as of July 1.

Last week, the city began offering commercial and multi-residential property owners the first glimpse of their expected 2021 assessments.

Some citywide data is expected to go to a council committee next week. Acting city assessor Eddie Lee confirmed Calgary has seen an overall decrease in both residential and commercial property values this year.

In the downtown, office rental rates have been dropping and vacancy rates have gone up, he noted.

“What that will translate into is an overall decrease in the value of offices, but we're not seeing anywhere near some of the previous years' (declines) where we'd seen up to a 32 per cent drop in one year,” he said.

That means the violent tax swings witnessed in 2019 shouldn't happen next year.

But there's another complication brought on by the coronavirus crisis to consider.

While more office space is empty, the pandemic has battered retail businesses, a category that saw a three per cent increase in assessed values for the 2020 tax year.

Grocery stores and bigbox retailers have seen sales improve this year, but businesses such as hotels, restaurants and tourism-related companies are facing an unprecedented storm.

Meanwhile, industrial properties are faring better with strong demand for warehouse and distribution space.

“We would anticipate an increase in taxes for industrial, and decreases for downtown and retail properties in general,” Lee said of the revenue-neutral assessment process.

Many Calgary business owners contend one solution to this mess is for city hall to significantly cut spending, dampening any potential tax shift to commercial properties.

Mayor Naheed Nenshi said council is aiming for a “tax freeze or better” for 2021, with budget discussions slated to begin in November.

“That is what we need to do in this economy,” he said.

Nenshi noted more people are now returning to work in the downtown, but he's still worried about the effect of the economic slowdown on street-front businesses that rely on pedestrian traffic.

“If people are even going to be working downtown fewer days a week, it's going to be harder for the downtown dry cleaner or lunch counter to be able to make a go of it,” he said.

Coun. Druh Farrell, whose ward includes part of the core, said all these headwinds underscore the need for further action by council to encourage more people to live in the area and to increase its vibrancy.

“We know this is a longterm problem that requires a whole host of solutions,” said Farrell.