City of Calgary Mayor Naheed Nenshi, has enjoyed sweeping popularity among Calgarians as the city’s municipal leader. From the way he and his fellow councilors dealt with the 2013 floods, to how he became the first Calgary mayor to grand marshal the Calgary Pride parade, to his seemingly effortless capacity to speak his mind; Nenshi is endeared by not only Calgarians, but Albertans, Canadians, and people from around the world (last year he won the World Mayor Prize).
Political popularity, however, does not necessarily predicate astuteness on every issue a politician may encounter. Recently, in the midst of a low energy price economic environment, Nenshi maintained that on the bright side, “our downtown commercial market is very strong and we’re getting a lot of folks saying they had been priced out of Calgary and now here’s their chance.” Nenshi mentioned that he was told “by very, very large skyscraper builders and commercial property developers, mostly backed by pensions, that they are patient money, and they make their money by building at this point in the cycle.”
So if it seems that Nenshi is implying that right now is a great time to be adding to downtown’s commercial real estate inventory, be aware that this view is not shared by many that actually are in the downtown commercial real estate industry.
Jim Rea, Executive Vice President and Partner of Colliers International’s Calgary office, is recognized by his peers and industry as one of the most successful commercial real estate advisors in the Calgary downtown market place over the past twenty years. Rea, however, disagrees with Nenshi that right now is a great time to be building more office space in Calgary’s downtown.
“Right now, there is an 11% vacancy rate in Calgary’s downtown office space market, and what we need to see is see growth in employment in occupied area to keep pace in additional inventory added. The significant current vacancy will keep rental rates somewhat depressed for a period of time and this will keep a lid on new construction. ”
Rea added that “at this point, there is enough [office space] inventory out there already to soak up any new demand that could occur in the next two to four years. We have already new space coming on stream in 2016, 2017, and 2018.”
The inventory that will soon be completed consists of 3.8 million square footage of office space representing 9% of the total market for the downtown space. As Rea said, this inventory is still under construction and has yet to be added to the overall market.
It is possible that Nenshi too quickly assumed that what the developers were telling him was in fact a certainty. In reality, the difference between a major real estate development actually happening versus it remaining on the drawing board most often depends on the eagerness of future tenants.
“Developers”, Rea said, “will always have projects in the pipeline. They can obtain a building permit from the City of Calgary which is valid for five years but the reality is, they need pre-lease commitments from major tenants to kick start a project.”