Deals down, risks up in Alberta office market
Fewer real- estate investors are purchasing commercial buildings in Alberta’s two major cities, as the market for office space weakens following the collapse in oil prices.
A report released Monday by Colliers International shows that commercial landlords in Calgary and Edmonton expect the market for office space and commercial real estate investments to continue to slow in both cities in the coming months.
Colliers expects capitalization rates, which measure investment risk in commercial real estate, to rise in downtown and suburban office buildings in Calgary and Edmonton this year. Rising “cap rates” signal that landlords should earn a lower return on their office space investments in the future.
“Increasing cap rates are considered a weakening fundamental,” managing director of Colliers’ Calgary office Laurel Edwards said.
She added that the spending pullback among Calgary’s largest companies, oil producers hard hit by the more than 50- per cent fall in crude prices, “would be the main factor” for the weakening office market. Downtown vacancy rates in Alberta’s cities have jumped in the 16 months since oil prices began to fall.
The situation in Calgary and Edmonton, where cap rates for all classes of downtown and suburban office space are increasing, stands in sharp contrast to the commercial real estate market in Toronto, Montreal and Vancouver, where landlords see investment risk falling.
At the same time, the number of investors purchasing office buildings in both cities have declined, the report said, adding, “investment in Calgary’s commercial real estate market is trending well behind the previous year’s third quarter levels.”
RealNet Canada’s director of market research Paul Richter said that last year there were 15 large commercial real- estate sales in Calgary, resulting in a total transaction of $ 693 million for the year. So far this year there have been five sales in Calgary for a total value of $ 186 million. “It’s dropped off a fair bit,” Richte said.
By comparison, there were between seven and 12 commercial office space sales — of over a minimum deal value of $ 5 million — every quarter between 2011 and the third quarter of 2013, but the volume of deals now has slowed substantially.
“There’s been a complete lack of transactions,” Edwards said. She added however that her firm is “not seeing buildings being placed on the market and not selling.”
Instead, many landlords are sitting on the sidelines, choosing not to list their commercial properties for sale in the current market.
Similarly, Richter said the sales data shows only a small drop in deal values so far. The average commercial real- estate sale in Calgary in 2014 was $ 47 million, compared with $ 37 million so far this year.
“I wouldn’t say that, on average, the values have come down, I’d just say that there’s fewer deals closing,” Richter said.
Vacancy rates have been rising in Calgary and Edmonton, as oil and gas companies have laid off thousands of staff and cut spending in an attempt to survive the oil price rout.
In Calgary, the result of layoffs at energy company headquarters has resulted in a phenomenon called “ghost vacancies,” where companies are holding onto space that they aren’t occupying rather than returning it to the market.
Many observers believe the city’s vacancy rate, which jumped to 12.7 per cent in the second quarter this year from 10.6 per cent in the first quarter, understates the amount of empty space available.