TIME TO TACKLE CORE OF OFFICE VACANCY PROBLEM
Waiting out the boom-bust cycle won’t work this time, councillor says
If the latest kerfuffle over businesses facing rising property tax bills has taught us anything, it’s that Calgary’s downtown has suffered a serious blow in the past 24 months.
And it’s going to take longer — much longer — than two years to fully repair the damage done by the recession.
But, looking at other North American cities that have endured similar problems, the good news is that recovery is possible. However, the future will not look like the past, and a lot of hard work lies ahead.
“Probably half of the entire city revenues come from the Centre City. So if the Centre City struggles, the whole city struggles,” says Druh Farrell, who represents part of the downtown as councillor for Ward 7.
“I’m a native Calgarian and have seen the boom-bust cycles. Historically, we’ve approached it by just waiting it out. That’s not going to work this time.”
City council is expected to debate a motion Monday from Farrell and Coun. Evan Woolley to hold an economic summit and examine issues affecting the downtown.
Organized by Calgary Economic Development (CED), the gathering would identify “emerging trends and opportunities.” A plan of action would be presented to council by the end of the second quarter.
The immediate issue for the downtown is an office market that has a significant vacancy rate. Too many tall towers have too few people inside them.
Demand for space has been falling due to the oil price slide and the layoffs that have unfolded across the energy sector since 2014.
Maggie Schofield, executive director of the Calgary Downtown Association, says since the peak of the boom, about 30,000 people have lost their jobs and no longer work in the core.
That has created other spinoffs, from fewer people using transit to less spending in retail shops or people eating out at restaurants.
“You can feel the difference,” she says. “It’s taken a while for it to hit everyone, but I don’t think that anyone has been untouched by the change.”
Colliers International pegs the overall downtown vacancy rate at 24.8 per cent in the fourth quarter of last year, and it reached 35 per cent in older Class B and C properties.
Just four years ago, when oil prices were strong, the vacancy rate downtown sat at 3.7 per cent.
This trend affects the entire city, not just the inner city.
With companies paying lower rents and needing less space, the assessed property values in these downtown buildings have dropped 17 per cent from 2016 levels.
Under the city’s annual assessment system, this means the tax burden will shift to non-residential properties outside the core.
Almost three-quarters of commercial property owners will face higher municipal taxes this year even though council has effectively frozen property taxes for 2017.
Joe Binfet, managing director of Colliers in Calgary, notes that with three large downtown buildings now under construction, even more office space will be added in the next couple of years.
That will push vacancy rates even higher, and it means no quick recovery in downtown property values to resolve the city’s taxation conundrum.
“It’s hard to paint a picture that we won’t have ample space for years to come,” Binfet says.
Given past absorption rates of vacant office space, it could take 10 years before the downtown office market is reasonably balanced.
If the problem isn’t going to fix itself, it’s important to come up with a blueprint to solve it.
Diversifying the economy is one strategy already being pursued. CED is trying to entice headquarters and other out-oftown offices to relocate here.
Chief executive Mary Moran says the group has also been examining other cities, such as Denver and Pittsburgh, for ideas.
Denver is a regional energy centre that grappled with a downtown office vacancy rate that exceeded 50 per cent in the 1980s, but was able to diversify its economy.
In the fourth quarter of 2016, Denver’s commercial vacancy rate sat at 11.4 per cent.
By putting together a long-term strategy, pursuing high-growth sectors of the economy such as finance and technology, and snagging satellite offices, Denver slowly made progress.
“We learned a lot from Denver in the sense they had small wins, not big wins,” says Moran.
And that leads to the proposed summit.
It should examine the root cause of these problems, not just the symptoms, and must debate possible solutions, such as what to do with older buildings or the potential conversion of unused office space to residential. Other ideas, such as encouraging postsecondary institutions to locate downtown, also merit discussion.
“There has to be something other than a hope,” says Scott Hutcheson, executive chairman of Aspen Properties Ltd., which owns six buildings in the downtown and co-chairs CED’s commercial real estate advisory committee.
“You have to provide the strategies to get there.”
Of course, the problem is much broader than just vacant highrises south of the Bow River. It involves how to capitalize on our skilled workforce, how to entice new sectors to a city dominated by one industry and — most importantly — how to attract jobs for Calgarians.
“I think we are in a crisis that has a way forward, if we take it,” Farrell says.
“So we can hand-wring and worry about the future, or we can take some action.”