Calgary office market will hit ‘peak vacancy’ this year

Forecast predicts vacancy exceeding 24 per cent in 2020 due to anticipated layoffs and corporate departures from Calgary’s office market

Calgary has not recovered from the two significant downturn years of 2015-2016, when GDP contracted by three per cent and 3.8 per cent respectively, and that’s going to mean another tough year for the city’s office market.

A report released by Avison Young says overall office vacancy in the city increased to slightly less than 23 per cent in 2019. It’s going to get higher, the report warns.

“Peak vacancy for the current downturn in Calgary’s economy, which commenced in 2015, was 23.5 per cent at mid-2018. Unfortunately, the present forecast predicts vacancy exceeding 24 per cent in 2020 due to anticipated layoffs and corporate departures from Calgary’s office market,” said the commercial real estate firm, adding that overall business confidence is struggling to remain positive.

“Real estate leasing and development decisions involve long-term plans. Uncertainty hinders those decisions. It was hoped the recent Alberta provincial and Canadian federal elections would provide certainty around policy choices and existing energy project decisions. However, the federal minority government result and growing economic and existential uneasiness in Alberta have not yet provided confidence to the business community. An erosion of business confidence has caused Calgary’s economy to lose ground on the GDP growth gains recently made.”

The report said the industrial sector is one of the bright points in the local real estate market. The development cycle during the last two years has added six million square feet of new industrial inventory to the Calgary market. 

“A pause in this development cycle is anticipated in the first half of 2020. If absorption meets or exceeds the forecast, additional new construction could commence mid-year 2020. As Calgary continues to mature as a distribution hub, the growth in online retail sales will be a key driver for the industrial market. As Calgary’s growth slowed in recent years, so has the pace of new big-box store openings. Developers are being cautious with new projects, monitoring overall performance within the sector,” said the report. 

“Even as Calgary is navigating challenging economic headwinds, the population has continued to grow. Demand for local service retail in new suburban communities is strong and outweighing the new supply being brought onstream.”

The report said 2019 represented the second time in more than 20 years that the office market represented the smallest share of overall investment volume for improved assets in the city. Industrial assets and ICI land will likely remain the favoured investment asset classes in 2020 with urban residential land and retail not far behind. Alberta will remain a strong real estate investment market as groups realize the value in the risk-adjusted returns available in the province, added the report.

Mario Toneguzzi is a business reporter in Calgary.

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