Commercial real estate market is staying afloat

Tenant base in industrial sector more resilient than office category

The commercial real estate fallout in North American energy markets is mixed and by property type, but fears about widespread adverse impacts have not materialized in Calgary where the impact has been centred mostly on the office market, CBRE Group said Thursday while recognizing continued oil price volatility could impede future market performance.

“The precipitous drop in oil prices has had a mitigating effect on Calgary’s commercial real estate market. Downtown office has been hit the hardest, with a large increase in the amount of sublease space. However, we have not yet seen a substantial drop in head lease rates,” said Greg Kwong, CBRE’s regional managing director for Alberta.

“Calgary’s industrial sector seems more resilient, the retail sector remains healthy and large capital pools remain interested in investing in all sectors in Calgary."

In the five key energy markets surveyed — Calgary, Houston, Denver, Dallas/ Fort Worth and Pittsburgh — office space available for sublease has increased by more than five million square feet over the past year.

“The slowdown in Calgary office assets does parallel an overall slowdown across sectors and most markets in Canada — outside of Vancouver, Edmonton and the Waterloo Region,” the CBRE report states.

The firm said it expects the Calgary economy, which has weathered oil price volatility in the past, will recover from the current setback once prices rebound.

“Given the expectation that oil prices will increase over the next 12- 18 months, the 5.7 million square feet of office development currently underway may be welltimed to accommodate the next round of growth in the oil and gas sector,” the firm said.

“The long- term positive outlook for conventional and unconventional oil and gas production in Canada is attractive to long- term investors, and bodes well for a 2016 market rebound.”

Kwong said Calgary’s industrial sector seems more resilient than the office sector as its tenant base is diversified outside of the energy sector with the product distribution industry. The retail sector is dealing with national and international retail closures that are unrelated to oil prices, but it remains healthy.

CBRE said total available sublease office space reached 3.7 million square feet in the second quarter of this year, surpassing the previous annual peak of 3.4 million square feet in 2009.

It said about 1.9 million square feet of the 2.4 million square feet of sublease space downtown has been created because of footprint reductions among 85 energy companies.

“Energy companies account for about 79 per cent of the total space available for sublet in the downtown submarket. The slowdown in overall leasing activity will likely result in negative absorption by the end of 2015, following 1.1 million square feet of positive absorption in 2014,” the report said.

“Through the first half of the year, Calgary has recorded 1.9 million square feet of negative absorption. Meanwhile, developers are bringing 5.7 million square feet of new supply to the market.

“These buildings will be completed over the next three years; prices may have recovered to more economical levels by the time they are ready for occupancy. The combination of slower leasing demand and growing supply — from new deliveries and space made available for sublease — is putting downward pressure on rents and increasing overall vacancy.”

A separate report Thursday from Re/ Max said low oil prices have slowed activity in commercial property markets, most notably in Edmonton and Calgary.

In Edmonton, commercial and land sales were down nine per cent year- over- year in the first half of 2015, it said. The overall value of those sales was off 13 per cent, falling below $ 1 billion at half- year for the first time in three years.

In Calgary, downsizing in the energy sector saw average net rents decline 19 per cent year- over- year, with the average vacancy rate of all classes at about 13 per cent.

Until oil rebounds, the markets in Alberta’s largest cities are expected to remain in a down cycle, Elton Ash, regional executive vice- president of Re/ Max of Western Canada, said in a statement.

The report said the short- term outlook for Calgary’s commercial property market is cautiously optimistic, with foreign and domestic investors continuing to be attracted to the market.

Energy companies account for about 79 per cent of the total space available for sublet in the downtown submarket.