Still plenty of activity coming to Calgary’s commercial sector

Dueling industry reports are challenging expectations of how active Calgary’s commercial market will be this year in wake of ongoing energy sector uncertainty.

Commercial real estate firm Cushman & Wakefield indicated in a recent study that Calgary’s development cycle has “come to an end.” It noted in the first quarter, the downtown office market alone experienced negative absorption of 1.2 million square feet, the largest quarterly decline in the city’s history.

Vacancy rates across the city rose to 8.5 per cent from 6.3 per cent during the quarter, said the report.

“Although the brunt of the declining oil price was felt in Q1 2015, it is expected that negative absorption will continue throughout 2015,” said the report. “Net rates will drop in the CBD (central business district), while the suburbs will be impacted to a lesser extent. History would suggest that we can expect tenants to begin taking back space once oil prices strengthen and the market regains confidence.

“In this economy it is unlikely any developer will commence construction on firmly proposed projects, due to difficulty in finding anchor tenants.”

Commercial real estate firm Avison Young, meanwhile, noted in a recent report there is currently close to six million square feet of office space under construction, with about 3.9 million square feet of that in the downtown area and two million elsewhere in Calgary.

A total of 22 office buildings are under construction in the city according to Avison Young, indicating uncertainty surrounding the price of oil has yet to show up in Calgary’s still-expanding borders.

In downtown, Calgary City Centre will add an additional 853,000 square feet of Class AA office space when it opens this fall. It will be followed in 2017 by the 615,000-square-foot Eau Claire Tower and 564,000-square-foot 707 Fifth Street, as well as the massive 1.4-million-square-foot Brookfield Place and 460,000-square foot Telus Sky tower in 2018.

Outside of downtown, Calgary’s suburban markets have seen plenty of action so far this year, with more than 480,000 square feet of leasing activity through the first quarter of 2015. Downtown, in comparison, has seen 400,000 square feet of space leased during the same period.

“All the rest of the markets [outside of the downtown commercial market] are still moving along at a very good level,” said Avison Young managing director Todd Throndson.

“I don’t think that any of them are percolating as if the economy was at the top of its spectrum, but I do believe the market outside of the downtown core is holding its own.”

Looking forward, several other smaller Class A projects will also add to the expanding list of new projects. In the Beltline, 11th Avenue Place is set to open later this year, followed in 2017 by the 316,500-square-foot East Tower of Place 10.

Of the 22 projects listed by Avison Young, more than 64 per cent of future downtown inventory and 55 per cent of coming beltline and suburban inventory has been pre-leased.

Calgary’s industrial sector, meanwhile, has yet to be significantly impacted by oil price declines, according to Cushman & Wakefield. Vacancy rate in the city declined to 4.3 per cent in the first quarter of 2015 from 7.4 per cent a year ago. More than one million square feet of space was leased during the quarter compared with 978,000 a year earlier.

In addition, first-quarter net asking rents were up to $9.96 per square foot from $8.63 last year.
However, Cushman & Wakefield noted an imminent wave of new projects could saturate the industrial market in the near future.

“With over 3.7 million square feet of new supply under construction and with nearly 0.9 million square feet firmly proposed product in the pipeline, it is expected that landlords will lose some leverage,” said Cushman & Wakefield.
“This is particularly apparent in the large bay market where currently over 3.5 million square feet of product is under construction, with just one million square feet of that product pre-leased.”