Calgary’s downtown office market has experienced elevated vacancy levels for over a decade, and with its lower-class buildings, the west end of the inner city has been particularly hard hit.

But there has been a glimmer of hope in the past two years as leasing activity has picked up for the battered asset.

In fact, according to Aly Lalani, executive vice-president, partner with Colliers, 2023 saw the most leasing activity in the west end in the past 10 years.

“A big cause of that is conversions (to residential space). We took 2.8 million square feet off the market - 120 tenants into the market. A lot of these tenants are already in the west end,” Lalani explained.

“They’re in the west end for a reason. There is definitely a flight to quality, it’s something we’ve seen since 2014 and it still exists today. It happens. But if a tenant is in the west end in 2024, they’re there because they either need to be, or want to be. They need to be from an economic standpoint, or they want to be from an access/egress/image standpoint.

“So when these 120 tenants were displaced, a lot of them stayed in the west end or at the very least in the B- and C-class market.”

Lalani said the trend has continued into 2024.

Rates increasing for class-B and -C office

“Rates have gone up in the west end over the last 18 months,” he added. “The B- and C-class market, there’s a lot of it in the west end obviously but there’s a B- and C-class market throughout the downtown core. B- and C-class rates, west end and centre core, have all increased.

"There are a few landlords who are not doing much leasing at all and those are the landlords that haven’t upgraded their buildings, and aren’t as easy to deal with, aren’t being flexible. So some of those buildings are seeing similar rates, maybe less demand, but the better-run B-class buildings are doing well,” he explained.

Lalani said a big driver for companies is getting employees to work. Those employees want amenities as well as good access and egress.

“By default, the downtown core is where a lot of companies are looking. Suburban, Beltline tenants are looking there. They’re not all making the move, but definitely some,” he said. “There’s a bunch of activity in the downtown core. People want to be around other people for the most part and companies want to be where there are other companies.

“I’d say between 2016 to 2019 was when we saw a bunch of immigration from the suburban Beltline market. It’s still happening, but it has slowed down a little bit. But a lot of movement you’re seeing downtown is movement from building to building.”

Ongoing conversions to spur more activity

Lalani said he foresees more conversion activity taking place with the city’s goal to eliminate six million square feet from downtown inventory.

“The city has provided grants for 1.5 million square feet. That’s all they’ve granted. The other 1.3 million square feet is from companies doing it on their own and maybe hoping for a grant after the fact. I think conversions will continue. The economics obviously have to make sense and with rising construction costs it is a factor, but I would say conversions will continue,” he said.

That will spur additional office leasing activity.

According to research from Barclay Street Real Estate, the Q3 downtown office vacancy rate in Calgary was 19.2 per cent, which is trending down. In the class-B market, it is 34.7 per cent but also trending down. 

A Q3 downtown office report by JLL cited just under 10 million square feet of inventory in the “west core.” The quarter saw just under 184,000 square feet of net absorption and total net absorption year-to-date was just under 314,000 square feet.

JLL said the average direct asking gross rent was $27.98 per square foot in the west core and $39.99 in the central core.

Kris Hong, executive vice-president, partner with Barclay Street Real Estate, agrees continued conversions will create more activity.

“Supply and demand . . . Definitely there’s a flurry of activity as tenants are sort of scrambling trying to find options when their building is getting converted. That’s why deals are actually more active in the market,” he said.

Calgary's largest leases of 2024

In 2024, there have been a few larger transactions in the overall Calgary downtown office market.

According to JLL research, the most notable large lease transactions so far this year are:

• CNRL, 400 4th Ave. S.W., 683,015 square feet (new lease);
• CNRL, 400 3rd Ave. S.W., 320,000 square feet (new lease);
• Vermillion, Centennial Place East, 132,000 square feet (renewal);
• KPMG, 240 4th Ave. S.W., 120,000 square feet (new lease);
• and AltaGas, 707 5th St. S.W., 120,000 square feet (new lease).

“I think the larger transactions have remained consistent. We saw pre-COVID some bigger ones as a result of immigration to the downtown core. I myself moved an 80,000 (square foot) tech company from the Beltline to the downtown core and that was in 2020 right in the middle of COVID,” Lalani said.

“The bigger deals, tenants have leases expiring, it goes to bringing back employees to the office. How are you going to do that? A lot of it is changing buildings to a better building that is maybe the same class that you’re in, but better amenities.

"We’ve done numerous employee surveys and what employees want the most are amenities. That’s a place to grab coffee, lunch, a drink after work, and a fitness centre.”