Nothing should surprise observers about Calgary’s red-hot office market, which according to one study is the priciest in the country. But how about this: after four successive quarters of negative absorption in 2013, downtown Calgary posted positive absorption for the second consecutive quarter.
That turnaround can be attributed to renewed merger and acquisition activity injecting new capital into the energy sector and putting some companies into growth mode, according to a recent report from tenant representation firm Cresa Calgary.
“A prolonged period of negative absorption can’t go on forever, the industries that drive Calgary are healthy and the sub-lease space that has come on the market from a lot of companies” essentially went “on sale,” said Damon Harmon, managing principal of Cresa Calgary.
In the second quarter, Calgary experienced 181,683 square feet of positive absorption and the combined downtown vacancy rate decreased a half point to 5.79%. The class-AA market decreased marginally to 1.99%. The class-A market dropped almost a point and a half to 4.93%. The B- and C-class markets increased to 12.17% and 11.89%, respectively.
Overall, Beltline vacancy held steady at 9.15%.
Cresa noted the “real story” of the second quarter is the quickly evaporating sublease market. At the beginning of the second quarter, more than 800,000 square feet of sublease space was available.
Three months later, this number has nearly been halved as most of the larger transactions completed have been in the sub-lease sector, creating “some urgency” for the few remaining pockets. Much of that space could disappear by the end of this year, Cresa reported.
Shrinkage in sub-lease availability has also prompted some landlords with large blocks of upcoming vacancy to offer “reasonably aggressive economic packages” to try to compete with the sub-lease market, creating some competition for certain A- and B-class landlords as tenants are exploring all options before making longer-term commitments.
Cresa forecasts that a lack of new supply of sub-lease space should tighten the market this year and into 2015. Eighth Avenue Place – West, the first development of the current construction wave opening this fall, for example, is fully leased and big tenants have already backfilled vacant space.
Cresa foresees a “two-year bottleneck in the market” as the next development set to arrive will be Calgary City Centre (850,000 square feet) in mid-2016. The sub-lease market will be key until then as it is the only thing that can temper the marketplace if demand continues as was experienced in early 2014.
In 2017 and 2018, “we should see a good game of musical chairs and a corresponding increase in vacancy” as the last four developments of this construction cycle arrive: Eau Claire Tower (615,000 square feet), 707 – 5 Avenue SW (564,000 square feet), Telus Sky (430,000 square feet) and Brookfield Place (1,400,000 square feet). To date, approximately two-thirds of these upcoming developments have been leased.
Cresa’s Harmon is confident about one aspect of his forecast. “I can say that I guarantee we will be wrong, that’s it. But Calgary changes, it can turn on a dime based on oil prices and world economics . . . many things.”
What could change Calgary’s office space picture is an impressive list of pending developments awaiting an anchor tenant. Cresa’s list includes several biggies: Brookfield Place Calgary West (41 stories 1 million sq. ft.); First Canadian Centre – East (27 stories 698,000 sq. ft.); Oxford Tower, (45-47 stories 1.2 million sq. ft.); Palliser West and East (29 stories, 620,000 sq. ft. apiece); Eau Claire Market Redevelopment (40 stories, 550,000 sq. ft.).
Harmon noted that one developer is not even waiting for an anchor tenant. Centron Group recently announced that it has begun construction of its 620,000-square-foot Place 10 office/retail complex on the north side of 10th Avenue between 4th and 5th Streets S.W., across the street from its Centre 10 building, ultimately giving Centron a million square feet.
“They are going on the first tower on spec,” he said. “It’s gutsy, but a lot of these developers in Calgary play that role. When you have a big firm that needs space and it happens from an acquisition standpoint in Calgary all the time, large blocks of space, there is limited availability.
“They hope they time it right and they have two to three years to lease it up.”
Avison Young this week also reported that Calgary boasts the highest class-A rents for downtown office space in Canada.
Average asking gross rent in Calgary was $51.17 per square foot at the end of the second quarter compared to the national downtown average of $43.99 per sq. ft. according to AY’s mid-year 2014 Canada U.S. office market report.
AY noted that demand for new space remains high in the Calgary market, evidenced by 8.9 million square feet of new office projects announced and nearly seven million square feet currently under construction.
Of that future space, more than 63% per cent of future downtown office inventory is pre-leased, as is 51% of new space in the Beltline and suburban markets.
“The market is expected to firm up modestly in the second half of 2014 as the ability of energy firms to borrow capital improves,” said the report. “Early signs of increased leasing demand are being seen with renewed growth among large engineering firms, which are expanding throughout the market.”