Has the Calgary downtown office market hit its bottom?
A new report by commercial real estate firm Cresa says the vacancy rate for the market edged up 0.5 per cent from the previous quarter, reaching 24.95 per cent in the second quarter of this year.
“Five years ago in Calgary, when office occupancy neared 97.5 per cent, you would have been hard pressed to find anyone who foresaw a vacancy rate near 25 per cent. … Keeping such a dramatic swing in mind, we find ourselves asking: where is the bottom of the market and how will we be certain when we find it?” said the Cresa report.
“In the first quarter, vacancy declined by a mere 0.14 per cent. This quarter, it increased by an almost equally slim margin. With plenty of churn, but no meaningful growth, are the modest changes we have experienced thus far in 2018 an indication of what is in store for the rest of the year?
“What we can say for certain is that there are signs the market is reaching the bottom. Without question, most of the bleeding has stopped; near the end of 2017, the downtown and fringe markets started to plateau, and that trend has become more obvious given the absorption numbers in the first half of 2018. Now the toughest two questions remain – where is ‘absolute zero’ for vacancy, and what drives growth to start the steep climb out of the current environment?”
The report found that total vacancy represented 10.9 million square feet in an inventory of 43.5 million square feet. Broken down, there was 7.5 million square feet of head-lease space or 17.32 per cent of the overall vacant space and 3.3 million square feet or 7.63 per cent of sub-lease space on the market.
Cresa said one natural indicator of the low point of a market trough is the presence of large commercial transactions, or in this case, of office towers changing ownership. And over the past two years, several downtown and Beltline properties either changed hands (partially or fully), changed use (i.e. conversion to hotel or residential), or were put on the market for sale.
“These transactions represent activity from several separate institutional holders of commercial real estate, including four entirely new entrants to the local market. It would seem to say that some landlords are viewing now as the time to enter the market, which is an indication of opportunistic mindsets and differing approaches with regards to the future of Calgary’s of office market,” said Cresa.
Respected business writer Mario Toneguzzi is a veteran Calgary-based journalist who worked for 35 years for the Calgary Herald in various capacities, including 12 years as a senior business writer.
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