It should come as no surprise that Calgary’s downtown office market is closely correlated to conditions in the energy sector. Approximately 75% of downtown office tenants operate in the energy sector and the most of the remaining 25% are there to support it. Since Q4 2014, the downtown office vacancy rate has risen from 8.5% to 25% now totaling 10.6 million square feet of vacant space with nearly 40% of that being sublease space.
Just how did we get here? Since 2014, approximately 5.5 million square feet of the vacancy can be directly attributed to corporate downsizing and M&A activity in the energy sector. At the same time, 3.7 million square feet of new office building construction conceived before the downturn in oil prices has been or is nearing completion further compounding the challenges now facing landlords.
Building owners have finally come to the realization that a return to strong growth and higher levels of office worker employment in the Canadian energy sector is not likely in the near and intermediate term. Even if the energy sector returns to the robust growth levels witnessed a few years ago, it would take several years before the vacancy rate reduces to the point that the market becomes “balanced.”
Having witnessed over two years of rising vacancy rates, building owners are now stretching to secure new tenants to bring their internal vacancies down. However, this is increasingly viewed as a zero sum game. One landlord’s gain is another’s loss and that will continue to put downward pressure on rental rates.
During a typical year, approximately 15% of office leases would be expected to expire, but with competing vacancies now at an all-time high, building owners are increasingly playing defense by providing significant financial incentives to motivate their existing tenants to extend leases sometimes 2 or 3 years in advance in order to prevent them from becoming “free agents.”
This in turn reduces the already short list of potential relocation prospects leading to even stronger competition for the limited number of remaining tenants considering relocation.
Contributed by Todd Sutcliffe, Vice President/Partner, and Craig Hulsman, Senior Associate of Colliers International