Sales of properties at low prices threaten recovery in core: Nenshi
Mayor Naheed Nenshi says he worries Calgary is not yet out of the woods when it comes to tackling the problem of downtown office vacancies.
While Calgary saw a slight improvement in occupancy rates in downtown offices over the past year, the latest figures suggest vacancies are climbing again and there are renewed fears the city’s office towers could sustain further losses.
“In the downtown, where you have a smaller number of very large and very expensive buildings, just one sale at a very low price can knock the bottom out of the assessment market,” Nenshi said in a year-end interview with Postmedia.
“So if we have one or two or three fire-sale sales of buildings in the downtown, this problem is going to rear its ugly head again.”
Calgary’s downtown office vacancy rate reached 26.6 per cent in the third quarter of 2019, according to a CBRE market report, up from about 24 per cent the previous quarter. And preliminary yearend numbers are expected to climb above 27 per cent.
Calgary-based real estate developer Strategic Group’s recent decision to obtain court-ordered creditor protection for some of its commercial properties has further raised fears about the potential for further downward pressure on downtown property values. The application was for more than 50 properties in Calgary and other parts of Alberta.
Nenshi said it’s still too early to know what the fallout will be from the Strategic Group restructuring.
“I believe it’s nine buildings downtown and 11 or 12 in the Beltline — and it’s not clear that those buildings will get sold, so I don’t want to make too much of it,” said Nenshi.
“But as we think about all of this, if in fact we have nine buildings in the downtown get sold for a really low price, that’s a big problem.”
CBRE regional managing director Greg Kwong said he doesn’t expect Strategic Group properties to suddenly “flood” the market.
“You might see five to nine properties sold in 2020 and then another 10 or 12 the next — it’ll be an orderly process,” said Kwong. “What they’re trying to do is just obviously get as much of their debt repaid as possible.”
However, Kwong said, he doesn’t expect the downtown properties to be sold at high prices: “It’s going to be at market, which is not that robust right now, quite frankly,” he said.
The higher the vacancy rate, said Kwong, typically the lower the property value.
“It is a sign of the times that there are a lot of owners that are hurting right now. I think you’ll see more (cases like Strategic Group), but not to the scale of this as far as numbers,” said Kwong. “We’ve already seen foreclosures on office buildings, so it’s not unusual — but the size and scale of it is unusual.
“A few sales will just add to the larger issue, which is the vacancy rate, which ultimately is a symptom of the unemployment rate,” said Kwong.
“It’s the fact that we have close to 60,000 people not working in the downtown core that were working five years ago.”
Elected officials are also concerned about what dropping downtown valuations could mean for the rest of the city.
Cratering values in the downtown in recent years have triggered a painful redistribution of the property tax burden, with taxes on the city’s downtown towers plunging while businesses outside the core have seen double-digit tax increases.
Coun. George Chahal, who previously worked in home building and real estate analysis, said the Strategic Group announcement is concerning.
The first-term council member says Calgary’s high office vacancy rates have come at a time when commercial real estate is already being buffeted by the rise of e-commerce and gig-economy companies that have shrunk demand for bricks-and-mortar storefronts and restaurants.
Even the return of a more robust oil and gas sector is unlikely to solve Calgary’s problems, Chahal said.
“If they do come back, they’re not going to hire potentially as many people as they used to have before, so that’s still going to leave a lot of vacancy in the downtown core,” said Chahal. “We have to start thinking, how do we fill those buildings? Who do we fill them with? And at whose expense?”
The Ward 5 councillor said he would also like to see city council move quickly to seek the province’s help in making changes to the property assessment system. Provincial rules currently determine how the city assesses property values and distributes the tax burden.
“We have one asset class right now in non-residential, we need to look at maybe having a couple asset classes so that we can have a varied approach in our assessment, valuation and taxation process,” he said. “And we would need further help from the provincial government to allow us to do that.”
Nenshi said he would welcome the province’s help in introducing a differential tax rate for small and larger businesses — and while a version of such a policy already exists on paper, he said, “it’s completely unworkable.”
“If we could have a little more power in terms of targeting tax relief or a different tax rate, then we can also effect a tax shift between businesses, where those multinationals who don’t need the money might pay a little more so the local dry cleaner can pay a little less,” he said.
If we have one or two or three fire-sale sales of buildings in the downtown, this problem is going to rear its ugly head again.