Calgary’s downtown office market continues to experience high vacancy. But the rate has dropped during the past year as leasing improves and city programs – to convert older office stock to residential use, along with a new demolition incentive – grow in popularity.
Commercial real estate firm Avison Young's latest report reveals downtown office vacancy was 27.1 per cent in Q1 2023, down 1.8 per cent over the past year. In Q1 2023, the downtown market had positive absorption of 78,980 square feet.
“Last year was an extremely active year, lots of business, lots of deals being done,” Todd Throndson, AY's managing director, principal, office leasing in Calgary, told RENX. “People were moving, people were renewing, people were renovating space, people were doing brand-new space.
“There was a lot of optimism, partly from companies returning to office, partly from the fact that last year was a very exciting year for energy, and partly because of the fact that a lot of companies are looking at the marketplace and their office space and how they can use office space to build excitement for their staff and build excitement for people coming back to the office.”
Current conditions in downtown Calgary
Downtown absorption was 125,901 square feet during the previous 12 months.
Throndson said Calgary's leasing market has again quieted a bit as companies assess the road ahead. Part of that is economic uncertainty, part also related to Alberta's upcoming spring provincial election.
“We really expect the second half of 2023 to be really busy. I believe there’s going to be a lot of activity," Throndson said. "There’s a lot of pent-up demand. There’s some major tenancies that will be looking at their leases and making decisions on how they want to move forward.
"It’s going to be a pretty interesting next six to nine months."
In the meantime, however, the slimming down of the city's downtown office inventory will continue.
The City of Calgary has announced five more office-to-residential conversion projects under the Downtown Calgary Development Incentive Program, which will eliminate about 500,000 square feet of space and create 530 residential rental units.
- Taylor Building (805 8 Avenue SW) – Cressey Developments;
- Petro Fina Building (736 8 Avenue SW) – People First Development Company;
- Eau Claire Place I (525 3 Avenue SW) – Cidex Group of Companies;
- Eau Claire Place II (521 3 Avenue SW) – Pacific Reach Properties; and
- The Loft (744 4 Avenue SW) – Institutional Mortgage Capital.
The five projects will receive a combined $36.3 million under the program. The estimated grant amounts are based on $75 per square foot of office space converted to living space.
A potential boost for downtown west
Three of the five projects involve buildings in the west end of the downtown – which has the greatest amount of empty office space.
Sheryl McMullen, manager, investment and marketing for the city’s downtown strategy, said added vibrancy in the downtown west will help make Calgary safer at all hours of the day. It’s an area that has considerable vacancy and is dominated by office buildings.
McMullen said there are now 10 projects in the incentive program and two other projects the city supported outside of the program. Combined, they will remove about 1.35 million square feet of office space from the market and create about 1,420 homes.
“Our program currently has $162 million funded by council. Of that amount, $153 million is for the office to residential and we’ve just added new uses to include hotel uses, schools K-12, as well as performing arts space . . . The balance of the $9 million is to do a pilot program for office to post-secondary conversions,” she said.
“In total, our target is six million square feet to remove from the market. When we first did our program, vacancy was 12 million square feet in the downtown office space. We targeted to remove half of that.
"So using our $75 a square foot as the highest incentive that we have for office to residential, multiplying that out we would need $450 million to achieve our target of six million square feet removed from the market.”
There is also a lower rate of $50 per square foot for hotels, schools and performing arts space.
City considers more projects, adds new incentive
McMullen said the city is considering three additional projects. It has reopened the program for new submissions and it has about $18 million from that first $153 million available for applications.
The new demolition incentive is up to $20 per square foot for buildings at end of life and not suitable for conversion.
According to CBRE’s Calgary Downtown Office Q1 2023 report, the downtown office inventory is 42,827,940 square feet, with 13,707,121 square feet of vacant space.
Throndson said the incentive program is having a positive psychological effect.
“I think everybody is starting to get pretty excited about some of the change that’s going to happen in our downtown market,” he said. “We’re going to be seeing more multires in the core, which I think is a very good thing for our market to have.
“We’re going to see work being done to the community with regards to some of these parks that are going to see upgrades, to make better environments for staff to be able to go to and feel safe when they go out and enjoy themselves at lunch hour, and coffee and after work.”
Shell move to create new challenge
While these are all good signs for the Calgary downtown office market, there are still challenges ahead. For example, last year Shell Canada announced it will move from its Calgary Shell Centre to The Bow tower, leaving a 315,000-square-foot hole in the downtown office market as the company reduces its space in the city by over half.
Shell confirmed to RENX it will lease 242,257 square feet in The Bow, whereas its head office in the Shell Centre was 557,198 square feet. The company’s timeline for moving into The Bow is mid- to late-2023.
Still, the downtown programs are good, positive first steps, Throndson said.
“When we get to that level of space coming out (six million square feet), then we’re going to see more impact on how landlords and tenants are perceived in the marketplace,” he said.
The city has allocated $3 million for the new Demolition Incentive Program.
“Any time that we look at taking out old product that really is no longer useable for any true commercial or residential opportunity, I think it’s a good thing and I think having a nice, clean site is a better picture into our downtown than having empty, vacant, boarded-up buildings,” Throndson said.
“What the city’s doing with these phased approaches to trying to help our downtown is a very positive approach. You start incrementally with looking at certain buildings and trying to get them to be adaptive and reusable and then you move into another phase where you look at some buildings which really do not have any potential at all."
Removing those buildings also opens up future opportunities for owners and/or developers to reimagine the properties in the future, he said.