Baclay Street partner, vice-president and associate broker for leasing and sales Dan Harmsen said few sublease transactions getting done in Calgary's downtown office market, similar to 2009. Photo by Michelle Hofer/For CREB®Now

Office market to face increased vacancy, lower lease rates

Calgary’s downtown office market struggled in 2015 and is expected to face challenges in 2016 due to prevalently weak economic conditions in the province’s oil patch, says a new report.

Commercial real estate firm Barclay Street Real Estate Ltd. reported the downtown office market finished the year with a vacancy rate of 17.29 per cent, up 2.23 per cent from the third quarter.

Vacancy was at a record high of seven million square feet at the end of 2015.

The report also noted 3.9 million square feet was returned to the market last year as the vacancy rate jumped 9.82 per cent year-over-year.

“The decrease in demand for office space is directly correlated with the ongoing decrease in oil prices, which came on aggressively and persistently tested new lows,” said the report, adding there is also uncertainty in the energy sector over fairly new provincial and federal governments.

“With overall sentiment remaining one of uncertainty and caution, both tenants and prospective tenants of this market are expected to continue waiting for indications as to what will happen next.”

Baclay Street partner, vice-president and associate broker for leasing and sales Dan Harmsen said he doesn’t have a crystal ball that can predict the long-term future when it comes to the city’s commercial real estate market.

“In January 2009, the sentiment was similar. Tenants were very reluctant to transact because of their nervousness about the market and as a result very few of headlease transactions are getting done. There are very few sublease transactions getting done. Just like the first quarter of 2009,” he said of the last time the economy was in a downturn.

“We are going to see that in the near future.”

He added new construction will also contribute to increased inventory in downtown, which will create higher vacancy rates and lower leasing rates.

In the next two years, four new office towers will be completed in downtown Calgary:

• Eau Claire Tower, 613,000 square feet, in 2017

• 707 5th, 564,000 square feet, in 2017

• Telus Sky, 432,000 square feet, in 2017

• Brookfield Place, 1.4 million square feet, in 2018

In fourth-quarter 2015 office market report by Avison Young, the commercial real estate firm said annual absorption, which is the change in occupied space, was a negative four million square feet across the city last year.

“As oil prices continue to fall, the amount of sublease space has risen as companies attempt to cut their expenses, resulting in significant increases in vacancy rates citywide,” said the report.

According to Avison Young, the Eau Claire Tower is 91 per cent pre-leased while 707 5th is 45 per cent and Telus Sky is 33 per cent.

Energy giant Cenovus has a commitment to lease about one million square feet in the new Brookfield Place skyscraper.