Downtown office vacancy rate rises
Oilpatch firms sublease space as growth stalls
… expect vacancy rates to remain in this range or even increase
Calgary’s overall downtown office vacancy rate nearly doubled in the past year, according to new data from commercial real estate firm CBRE Limited.
The company said the vacancy rate jumped to 9.1 per cent in the fourth quarter of 2013, up from 5.0 per cent in the fourth quarter of 2012.
“The one single factor (for the rise in the vacancy rate) is the amount of sublease space coming onto the market,” said Greg Kwong, executive vice-president and regional managing director of CBRE in Calgary. “A good chunk of that was in the third and fourth quarters.”
The percentage of sublet space in overall vacant space rose to 46.2 per cent from 38.7 per cent.
Kwong said several oil and gas companies have given up office space as the industry experiences a minor slowdown. But he added the drop-off in demand won’t be a longlasting trend, citing the commercial real estate’s resiliency during the most recent worldwide recession as an example of Calgary’s strong economy and how it had rebounded from that time.
Ben Brunnen, an economic consultant in Calgary, said the rise in commercial vacancy rates is concerning but not surprising.
“A lot of the big oil and gas com- panies secured excess space back in 2011 and 2012 when the market was tight and growth projections were positive,” he said. “Unfortunately, the sector hasn’t expanded as planned and some companies are even undergoing major restructures. As a result, corporations are putting their space back on the market in the form of subleases, which is driving up vacancy rates.
“Looking ahead, although investment in the energy sector will continue, it is expected to moderate, which means companies will be watching their bottom lines. With new commercial property inventory coming online in the next few years, expect vacancy rates to remain in this range or even increase.”
The CBRE report said the Class A space vacancy rate was 6.8 per cent to end 2013, up from 2.3 per cent a year ago.
With the spike in the vacancy rate, leasing prices have come down.
CBRE said the average Class A net rent was $36.76 per square foot in the fourth quarter of 2013, which was down from $40.58 in the fourth quarter of 2012.
This past year also saw absorption — the change in occupied space — fall by 1.6 million square feet in the downtown office market after a positive 2.1 million square feet in 2012.
The report said 4.7 million square feet of office space is currently under construction in the city’s downtown. There were no new office completions in the downtown in 2013.
The total downtown office inventory at the end of the year sat at 38.5 million square feet.
Harrison Gallelli, business development manager for real estate and location for Calgary Economic Development, said the current office development cycle represents 12.1 per cent of the total inventory. During the last downtown office construction boom of 5.5 million square feet, it represented 16.8 per cent of total inventory, he added.
Gallelli said the nature of Calgary’s economy, based primarily on the energy sector, is that eventually large anchor tenants come along when the industry is doing well and they end up taking up that new space. Also, not all the new construction is coming on line at the same time.
In the past decade, the downtown vacancy rate was at its lowest in the fourth quarter of 2006 at 0.5 per cent and at its highest in the second quarter of 2010 at 15.7 per cent. The highest rates were in 1983 at 22.3 per cent and in 1992 at 21.8 per cent.
Todd Hirsch, chief economist with ATB Financial, said Calgary’s current vacancy rate is pretty much where it was expected to be.
“It’s in line with a balanced real estate market,” he said.
Another factor in the vacancy rate’s hike, added Hirsch, is “a bit of an exodus” this year from the downtown core by companies to more affordable space in the suburban office market.