Negative absorption sets record in 2013
CALGARY – A giant step towards a more balanced downtown Calgary office market was taken in 2013 and landlords and tenants can now negotiate from an equal footing, says a new report by commercial real estate firm Colliers International.
The report said this represents a significant change from 2010, 2011 and 2012 where landlords were able to secure tenancies at elevated rates with minimal tenant inducements.
With four consecutive quarters of negative absorption – the change in occupied space – through 2013 totaling 1.58 million square feet, 3.6 per cent was added to the vacancy rate which now stands at 7.28 per cent, said Colliers.
It represents the greatest amount of annual negative absorption the Calgary downtown office market has ever experienced.
“We are moving to a balanced office market downtown. In Calgary we get used to the whipsaw volatility of the market and tend to forget what is normal for the rest of the country,” said Joe Binfet, managing director/broker for the Colliers office in Calgary. “We are seeing availability of space across all building classes – vacancy in AA space is up to three per cent which while still low is unusually high for our market.
“We are seeing more deal activity in the energy sector with mid to large companies selling assets and trading assets to fund operations. Simply put, we are seeing a diminished demand with additional supply coming onto the market.”
Binfet said the city is adding five million square feet of new inventory to the downtown market over the next three years. Currently, there is just under 39.8 million square feet of downtown office space.
“It seems we are continually changing the face of the downtown landscape with new iconic buildings that reflect the dynamic nature of our city,” he said.
“There is definitely cautious optimism in the market as we are seeing leasing transactions take place. Companies with proven management teams are able to raise capital and make real estate decisions in terms of securing space in the new developments downtown.”
Colliers research indicates that the asking net rent for Class A and AA space in the downtown dropped in the fourth quarter of 2013 to $29-39 per square feet compared with $38-45 per square feet in the fourth quarter of 2012.
Colliers said a balanced office market is typically a market whose vacancy rate falls between eight per cent and 10 per cent.
“Although current vacancy is 7.28 per cent, the market momentum is moving towards increased vacancy as we have yet to realize the full effects of Imperial Oil vacating approximately 740,000 square feet in Fifth Avenue Place in 2016 and the addition of new inventory and backfill space as a result of tenants relocating into office towers currently under construction,” said the report.
It said a number of factors are contributing to upward momentum in the vacancy rate. The effects of the decisions made by Imperial Oil and Canadian Pacific Railway to relocate to the suburban office markets are beginning to be realized. Also, low Western Canadian Sedimentary Basin pricing and forecasts for continued soft pricing have created circumstances where oil and gas companies do not have the capital required to fully exploit their reserves. And the restriction on foreign investment rules has redirected large available capital pools to countries who offer greater certainty on foreign investment dollars.”