Calgary’s downtown office vacancy rate climbed 1.5 per cent during the second quarter of 2016, as another 620,000 square feet of space emptied out. Colliers International pegs downtown office vacancies at 22 per cent as of June 30, ranging from 16.8 per cent in AA class buildings to 29.4 per cent in hardest hit class B stock.
More than 9.2 million square feet of downtown space is now unoccupied, while the market awaits the arrival of 2.3 million square feet currently under construction and scheduled for completion by 2018. Of this, 1 million square feet has not yet been leased.
Rents continue to slide, with the average net asking rent reported at $17.50 per square foot — down from $25 one year ago. However, Colliers analysts forecast this momentum will slow somewhat as the current ratio of head lease to sublease space rebalances in the coming months. They expect landlords to hold a harder line on rents once they take back a greater portion of the nearly 3.8 million square feet of sublease space now available downtown.
“Landlords are less inclined to lower rental rates as they are focused on maintaining building asset value, whereas sub-landlords are less concerned about lower rental rates, as their prime motivation is to reduce liability and overhead,” Colliers’ Q2 report for downtown Calgary reasons. “With head lease space representing the majority of vacancy in 2017 and beyond, we can expect rental rates to remain more resilient as landlords benefit from reduced competition from the sublease market and less downward pressure on rental rates.”
Lower rents and lower building valuations typically translate into lower property tax — one of the rare happier outcomes of the downturn — giving landlords some room to pass through operating cost discounts. Others landlords are also cutting parking rates as the smaller downtown workforce lowers demand for parking spaces.
Yet, analysts calculate the cycle is in the vicinity of its lowest point. The downtown Calgary vacancy rate is projected to rise still higher before year-end with another 400,000 square feet added to available supply, but that’s a slower pace than in the first quarter when more than 1 million square feet of space was returned to the market.
The price of oil has likewise recovered from a low of $26 per barrel to the $50 range, prompting some entrepreneurs to purchase distressed oil and gas assets and get into the industry themselves, which bodes well for office demand. A modest migration from outlying office nodes to downtown Calgary also continues.That said, Colliers’ highlighted list of five notable transactions collectively total less than 100,000 square feet, making a fairly negligible dent in available supply.
“Looking forward, Calgary’s downtown office market will remain oversupplied for the foreseeable future as the energy industry struggles to find stable ground during this economically and politically challenging time,” the report concludes.