Softening of oil prices results in reduced demand for office space
Calgary’s downtown office market experienced something in the third quarter it has not seen for more than two years — reduced demand for space.
A report by Newmark Knight Frank Devencore says absorption, the change in occupied space, in the quarter was a negative 141,000 square feet, the first loss in more than two years.
Michael Gigliuk, the real estate company’s vice-president/associate and author of the report, said the negative absorption signals a shift in demand downtown.
“The softening in demand is the result of conventional oil and gas energy firms cutting back capital expenditure budgets and drilling activity,” said Gigliuk.
“As a result of the anticipated 20 per cent drop in capital expenditure spending, absorption is expected to be negative for the remainder of 2012 and into 2013.”
During the third quarter, the vacancy rate increased from 3.8 per cent to 4.2 per cent. Also during the quarter, 100,000 square feet of new sublease space and 41,000 square feet of headlease space came on the market.
“Sustained low natural gas prices, weak capital market support for energy firms, poor oil and gas firm financials and European recessionary conditions are beginning to negatively impact demand for office space,” added Gigliuk.
He said a new building cycle has begun with the commencement and/or site preparation for: Eighth Avenue Place — West, 841,000 square feet; Calgary City Cen- tre, 820,000 square feet; and 505 2nd Street S.W., 103,600 square feet.
Completions are scheduled for mid-2014 through to 2016.
Gigliuk said about 58 per cent, or 981,000 square feet, of the 1.764 million square feet of the three new buildings has been pre-leased.
He said AA and A class vacancy in the downtown remains extremely low at 0.3 per cent and 1.1 per cent respectively.
Just last week, energy giant Imperial Oil announced it will move its downtown headquarters to the southeast Quarry Park development. The company and its 2,300 employees will relocate into five low-rise buildings, starting in 2014.
Gigliuk said the Imperial move “will be a gamechanger in terms of the long term tenant mix and office demand in the downtown office market.”
Meanwhile, a report released Thursday by Cushman & Wakefield said Calgary’s central vacancy rate increased slightly from 3.1 per cent in the second quarter to 3.2 per cent in the third quarter.
The third quarter trends report said the vast majority of the space that Encana and Cenovus will leave behind as a result of their move into The Bow has long been leased, and little new vacancy will come to market.
“That said, Calgary has seen a significant change in mindsets as oil prices softened over the summer,” said the report. “While the market remains remarkably tight, tenants are far more cautious, and multiple bidding on larger blocks of space has noticeably eased.”
A year ago, the central market vacancy rate was 6.4 per cent.