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ANALYSIS: DOWNTOWN<br />
Confidence continues<br />
Increased vacancy rate creates<br />
sublease opportunities<br />
Chris Howard<br />
Vice-President,<br />
Capital Markets Group,<br />
Avison Young (Canada) Inc.<br />
1.5M<br />
Of the 1.5<br />
million sq. ft.<br />
of office space<br />
remaining for<br />
delivery in 2015,<br />
602,000 sq. ft.<br />
remains available<br />
for lease.<br />
BETWEEN <strong>THE</strong> END of 2013 and the end of 2014, the<br />
vacancy rate in the Calgary downtown leasing market<br />
rose from from 6.1 per cent to 7.2 per cent, continuing<br />
a trend from the end of 2012 when Avison Young reported<br />
a downtown vacancy rate of just 4.1 per cent.<br />
Included in the 2014 year-end number was 952,000<br />
square feet of sublease space, representing 2.3 per<br />
cent of the overall vacancy.<br />
Early in 2014 it was apparent that downtown office<br />
vacancies and lease rates would be determined by<br />
the fate of projects such as Keystone and the Northern<br />
Gateway Pipeline, along with oil-sands mega-projects<br />
such as Joslyn Mine, Kearl, Dover and Firebag.<br />
But despite the warnings of delayed pipeline approvals<br />
and the postponement of two of the oil-sands<br />
projects, strong economic confidence during the first<br />
nine months of 2014 led many companies to expand,<br />
The current economic environment will likely<br />
lead to merger and acquisition activity, resulting<br />
in increased available sublease space.<br />
leading to positive absorption of office space from<br />
January to September 2014 even with two new buildings<br />
added to the inventory.<br />
But the fourth quarter saw a sharp reversal, with<br />
331,000 sq. ft. of negative absorption leaving the yearend<br />
total in negative territory at -309,000 sq. ft.<br />
In 2015, demand for downtown office space is expected<br />
to remain cool and will likely favour sublease<br />
premises. If oil prices remain in the $50 to $60 per<br />
barrel range into the third and fourth quarters, 2015<br />
will be a challenging year for landlords with class B<br />
and C headlease space, as demand continues to slow<br />
with sublease availability projected to increase.<br />
The current economic environment will likely<br />
ramp up merger and acquisition activity, resulting<br />
in increased available sublease space. The Baker<br />
Hughes-Halliburton and Repsol-Talisman mergers, and<br />
others yet to be announced, will likely make it possible<br />
for well-positioned smaller companies to acquire<br />
space in class AA and A buildings at attractive rates.<br />
Further, “employee expense minimization programs”<br />
(i.e. layoffs) at some companies will see fewer people<br />
in offices, putting space onto the sublease market.<br />
There are currently 21 office buildings under construction<br />
in Calgary, containing about<br />
5.7 million sq. ft. of office space.<br />
Despite a stable but rising vacancy<br />
rate in 2015, the Calgary downtown<br />
office inventory continues to grow. Of<br />
the 1.5 million sq. ft. of office space<br />
remaining for delivery in 2015, 602,000 sq. ft. is available<br />
for lease. Looking to 2016 and 2017, 68 per cent<br />
of future downtown inventory has been pre-leased,<br />
as has 48 per cent of upcoming Beltline and Suburban<br />
inventory. By 2018, downtown Calgary office space<br />
will exceed 45 million sq. ft. ■<br />
The pulse of Calgary’s commercial real estate industry TM<br />
23
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