Alberta office market feeling pain from oil price plunge.
Spare capacity at low level
The world may be swimming in crude oil right now, but a price spike may be just one geopolitical event away.
The world’s safety cushion to compensate for sudden disruptions of global production is historically low, as Saudi Arabia’s spare crude production capacity stands at only 1.1 million barrels per day, according to Norwegian energy consultancy Rystad Energy.
“The oil market is at risk of price spikes despite the focus on oversupply,” says Nadia Martin, senior analyst at Rystad Energy. “Current spare capacity is far lower than the 2.1 million bpd of spare capacity the Kingdom held in 2009, when the oil market last demonstrated a significant mis-balance in supply and demand.”
While the International Energy Agency pegs Saudi spare capacity at 1.96 million bpd — or 86 per cent of OPEC’s capacity — Rystad believes Saudis can realistically pump just over a million bpd of new oil in a short time frame.
In addition, it would take the Saudis 90 days to raise production to its maximum capacity, according to new IEA estimates, compared to the 30 to 60 days previously forecast.
“The market is very focused on oversupply, meanwhile the margin of error is small and it remains a volatile world,” says Ann-Louise Hittle, head of macro oils at energy consultancy Wood Mackenzie, which estimates global spare capacity at two million bpd. “That’s still not a lot of spare capacity in a market of 95 million bpd.”
West Texas Intermediate fell 21 per cent in the third quarter, but has traded higher in recent days to reach US$45 per barrel on fears of a widening conflict in Syria and a storm off the U.S. east coast.
Oil traders are also keeping an eye on a strategic oil shipment waterway located between Yemen and Horn of Africa that was recently retaken by Saudi-led forces from the Houthi group in Yemen. On average, j us t under four million bpd of oil passes through the Bab El Mandab strait.
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,” Richter 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 are 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.