Second worst decline on record
CALGARY – Decline in demand for the Calgary downtown office market in 2013 was the second worst on record.
A survey by the commercial real estate firm, Newmark Knight Frank Devencore, said total annual absorption, the change in occupied space, was a negative 1.15 million square feet this year and only 2009 had a larger negative demand year at 1.63 million square feet.
The survey, by Michael Gigliuk, the company’ vice-president in Calgary, said it’s a remarkable turnaround for the downtown office market as just two years ago it shattered all previous office demand years, by a wide margin, with positive absorption of 3.75 million square feet.
“Overall it’s been a reversal of the bullishness we had in the oil and gas market over the past three years. That’s definitely changed now. Tenants were aggressively taking space in anticipation of growth and that hasn’t happened,” said Gigliuk.
“Unless we see the fundamentals turn around, it’s looking like we’re going to be in a similar situation in 2014. We’ve got to see gas recover somewhat. We’ve got to see the differentials narrow for Alberta oil producers. And we’ve got to see some supply constraints taken care of. It’s difficult to see that turning around next year.”
The year-end vacancy rate was 6.5 per cent.
“Some of the high negative absorption result was due to excess space that large users had leased but never occupied and were holding, in anticipation of strong growth projections that never materialized,” said the real estate company. “However, the rate of change, moving from 3.7 per cent at year-end 2012 to the present level . . . is a dramatic reversal of the rapid drop in the vacancy rate of 12 per cent that had occurred over the prior three years.”
The report said 4.9 million square feet of new construction is underway and is 62 per cent preleased. Another estimated 1.42 million square feet is in the advanced pre-leasing stage.
“Also, on the supply side and contributing to the expected sustained rising trend in the vacancy rate is the amount of upcoming headlease and sublease vacancy scheduled to be coming on the market from the existing inventory,” said the report. “Current estimates for upcoming vacancy in existing buildings, over the next two years, now totals almost 700,000 square feet.”
It said the weak demand was a direct result of oil and gas industry challenges in 2013 as oilsands capital expenditures had an estimated $10 billion withdrawn from the sector over the year. Benchmark prices were also affected by transportation constraints and refinery shutdowns. It said lack of investor confidence in the energy sector is making it increasingly difficult for companies to raise capital for their drilling and exploration programs.
Just last week, a report by Cushman & Wakefield, said weak demand will continue to characterize Calgary’s central office markets over 2014, though improved global economic conditions and positive outcomes that will strengthen Alberta’s ability to ship oil should buoy demand into 2015.
The report said Calgary’s premium class vacancy rate is projected to rise to 6.7 per cent by the end of 2014, and reach 7.3 per cent by the fourth quarter of 2015. Rental rates should decline modestly, it said.