Cautious commercial

Calgary's core office market could see vacancy increases that endure even after a recovery in oil prices

According to a new report from commercial real estate firm Cushman and Wakefield, the negative effects of the drop in oil prices could remain for up to a year after a rebound.

"Although the brunt of the declining oil price was felt in Q1 2015, it is expected that negative absorption will continue throughout 2015," said the report.

"Net rates will drop in the CBD (central business district), while the suburbs will be impacted to a lesser extent. History would suggest that we can expect tenants to begin taking back space once oil prices strengthen and the market regains confidence." As a result of declining oil prices – which have remained close to $50 US a barrel for West Texas Intermediate since mid-January after topping the $100 mark for much of 2014 – the report also speculates projects proposed for downtown could be put on hold until more anchor tenants are found.

Through the first quarter of 2015, vacancy rates in the city have risen to 8.5 per cent, up from 6.3 per cent a year ago, with the downtown market experiencing 1.2 million square feet of negative absorption – the largest such number ever seen in the city, according to Cushman and Wakefield.

Along with the uptick in the number of offices being vacated in the core, average rents have also declined, falling from $26.40 per square foot in the fourth quarter of 2014 to $24.93 in the first quarter of 2015, according to commercial real estate firm CBRE Limited.

"We are nearly nine months into the decline in oil prices and the Calgary office market has responded as expected," said CBRE research director Ross Moore. "Both sublet space and direct vacancy are on the rise, but have yet to reach levels recorded during the last drop in oil prices in 2008."

Commercial real estate firm Avison Young has also noted many companies in the city with leases set to expire in the coming months are taking a "wait-and-see" approach, which has been evident in the lack of activity in the downtown core.

"The downtown office market is a very quiet business environment today," said Todd Throndson, managing director of office leasing for Avison Young Calgary.

"There are a lot of companies that obviously are going through some very significant structural changes and they're going through some economic hurdles they're trying to overcome."

Moving forward, Throndson said businesses in the downtown commercial market will be "relatively cautious" as it relates to moving forward with leasing activity even in the event of a marked improvement in oil prices.

Similar to the provincial government's recent budget, which reassessed spending levels based on an average oil price of $55 per barrel, Throndson said companies may take the opportunity to re-examine their own spending levels.

"Over the last four years, [businesses] have had some very good times and watching their expenses haven't been their number priority – growing their business has," he said.

"So during this time period, we're seeing a lot of businesses really looking at their bottom line, really at their efficiencies, really looking at their personnel and trying to determine where they can cut their costs to make sure they're operating their business at the maximum capacity. I don't think people are going to run and jump into an elevated expense matrix in the near future."

While activity – both in terms of leasing and construction – may have slowed drastically from the record highs of recent months, there's still plenty of room for optimism, said ATB Financial economist Todd Hirsh, citing the 2008/09 recession and subsequent recovery.

"Recent data suggests a drop in new commercial building permits in Alberta, an unsurprising development given the economic slowdown this year," he said.

"In February, commercial permits fell to $191 million, the lowest in about three-and-a-half years. That means construction spending in the coming months will also pull back from recent record highs. But if history is any indication, the slowdown in 2015 is likely to be temporary."

In 2008, oil prices skyrocketed to $140 per barrel before plummeting to just above the $40 US mark by the end of the year. During that cycle, prices climbed back to $70 per barrel by mid-2009.