The connection between slumping oil prices and the strength of the Canadian economy has been highlighted in CBRE’s just released first-quarter report on the country’s office market.
Calgary accounted for a whopping 1.3 million of those square feet in the form of direct and sublease space, while the national vacancy rate rose from 10.7% to 11.1% over the quarter. (That is still “well below” the peak of 11.9% hit in early 2005.)
“If you black out Calgary, the numbers are effectively zero,” said Ross More, CBRE’s Vancouver-based director research, who has been spending a fair amount of time in Alberta’s business capital.
“I was shocked. I have seen these downturns in Calgary so many times now and they always bounce back. But I think the severity of the downturn in downtown Calgary has even caught me by surprise. To hear expressions like ‘a no-bid market,’ that is really saying something.”
Quiet, too quiet
Calgary is suffering through the fallout from the halving of oil prices a number of media reports attribute to an ongoing campaign by Saudi Arabia to cripple upstart fracking producers of tight oil and natural gas in the United States.
That has forced the energy industry to slow down capital spending throughout Alberta’s oil patch and property owners are seeing the effect in more empty space and deepening pessimism. “Downtown Calgary has gone very, very quiet. Way, way more so than the ’08, ’09 slowdown,” Moore added.
“Obviously the election results were the icing on the cake. These guys were already sitting on their hands” prior to the surprise election of a NDP provincial government.
CBRE’s head researcher noted a negative change in attitude among Calgary’s business class.
“The oil and gas guys were saying, ‘We can handle the higher corporate tax rate and we can handle the higher royalties as long as it is not crazy. But what scares us is things like new environmental rules and regulations, emission standards, (a higher) minimum wage,’ all that stuff.”
More space coming
While Calgarians generally worry about oil returning to “normal” higher prices, office owners in the city need to be concerned with the pressure new builds will have on the market.
This quarter will see the completion of Imperial Oil’s 751,496-square-foot campus and the second half of the year will see the completion of the 210,000-square-foot Quarry Crossing Building B. According to CBRE data, the pipeline continues in 2016 with the completion of two towers, Calgary City Centre and Eau Claire Tower (a combined 1,531,908 square feet) and the 564,000-sq.-ft. Manulife House in the first half of 2017.
“For me the concern in Calgary, this is the sense I got last week, it is anecdotal, is that everyone is busy, but they are busy working on work that originated last year and what is missing is new work coming through the door.”
More new soon
CBRE noted that while there were no new towers completed in a big city downtown in the first quarter of the year, a total of 12.2 million sq. ft. is under construction downtown, primarily in Calgary, Toronto and Vancouver.
Vancouver is expected to gain 900,000 sq. ft. next quarter, or about 4.2% of its downtown inventory, which should push the downtown vacancy rate to 11%, its highest rate in a decade. Those new builds, the Pacific Centre and MNP Tower, are however “effectively full” at 91% and 76%, respectively.
In Toronto, the downtown new builds are headlined by Allied REIT’s QRC West (285,581 sq. ft.) and Brookfield Office Properties’ Bay Adelaide Centre East (1,017,826 sq. ft.) due this year and early 2016, which “will leave a substantial amount of office space left to backfill.”
Montreal, meanwhile, had two major downtown developments announced this quarter: Ivanhoe Cambridge’s Tour Manuvie (471,200 sq. ft.) and Rester Management’s Desjardins building (200,000 sq. ft.). Nearing completion in Quebec’s business capital are the Deloitte Tower (495,067 sq. ft.) and 3500 St. Jacques (227,900).
“It is not just a Toronto phenomenon,” said Moore. “We are looking at fairly large blocks of space in Montreal. These are in good buildings but these are 20-, 30- (thousand-square-foot) blocks. Toronto has half a dozen big, big blocks, Calgary has probably three or four big blocks,” while Vancouver has some floors available.
“It is starting to add up and there are no obvious tenants for that space.”
By the numbers
CBRE also discovered that among the biggest cities, only Toronto and Edmonton were able to produce positive absorption.
Downtown Toronto benefited by “several new leases signed and relocations from the suburbs” which will lead to a widening in the downtown vs suburb vacancy spread.
The real estate services firm expects energy firms to stay on the sidelines for the next few quarters while technology firms become more active in leasing space.
It noted in Vancouver close to 40% of demand is coming from technology tenants, who are typically looking for non-traditional office space characterized by smaller floor plates, transit access and tech touches like high ceilings, open spaces and advanced power infrastructure.
In a West vs East story, Alberta’s woes have led to a 110 bps increase in overall vacancy to 10.2% while vacancy in the East remained unchanged at 8.2%.
Equally dramatic is the ‘burbs vs core changes. Suburban vacancies nationally rose by 90 bps to 13.9% in the quarter while downtown vacancies rose 70 bps to 8.9%. The spread differential in vacancy rates between class-A properties is now close to a record high of 497 bps.