Downtown office vacancy rates expected to climb

Lower-class spaces feeling brunt of energy downturn

Vacancy rates in Calgary's downtown office market have hit historic highs in 2016, and commercial real estate experts are forecasting further declines moving forward.

According to a second-quarter market report by Colliers International in Calgary, the overall vacancy rate in the core has jumped to more than 22 per cent from 20.5 per cent the previous quarter – the equivalent of 618,716 square feet of office space.

Vacancy rates between classes varied, but were steepest in the B-class at 31.8 per cent and C-class at 28.1 per cent. AA- and A-class vacancies were also up from the previous quarter at 17.6 and 18.9 per cent, respectively.

"We are seeing tenants exploring A-class buildings as rental rates have softened and there are more options available to choose from," said Joe Binfet, managing director of Colliers International in Calgary.

"The migration to premium space puts upward pressure on vacancy rates in the B and C class buildings that tenants are moving from."

Moving forward, Colliers and other commercial real estate firms expect the downtown office vacancy rate to hit between 25 and 26 per cent by 2018.

Three new buildings are set to be completed by that year, adding an additional 2.3 million square feet to the downtown office market. And one million square feet in those buildings remains available for lease.

The Colliers report noted steep vacancy rates in lower class buildings are putting pressure on landlords to reduce rental rates.

Of the 9.21 million square feet of vacant space in downtown Calgary during the second quarter of 2016, 2.75 million square feet was in the B class and 1.18 million square feet was in C class. Colliers noted the average asking rental rates in the second quarter were:

• $10 – $25 per square foot for AA class

• $5 – $18 for A class

• $0 – $12 for B class

• $0 – $10 for C class

A year ago, they were:

• $15 – $35 for AA

• $5 – $25 for A

• $0 – $16 for B

• $0 – $12 for C

A separate CBRE Ltd. report noted rental rates in downtown Calgary are down 57.4 per cent from their peak just before the 2008 financial crisis. Broken down by class:

• 58.9 per cent for AA

• 59.5 per cent for A

• 61 per cent for B

• 63.7 per cent for C

"Tenants are taking this opportunity in the market to improve the quality of their office space by moving up one or two building classes," said John Savard, principal of office leasing specialist with Bedrock Realty Advisors Inc.

"Tenants in C-class buildings are moving to B-class, and B-class tenants are moving up to A- or even AA-quality buildings.

Savard noted many tenants are planning for the forthcoming millennial-aged workforce; they are finding their younger class of workers want more building amenities such as fitness facilities, restaurants and even day cares.

"The older C- and B-class buildings were not built to accommodate such amenities," he said. "Furthermore, C-class tenants are often less financially resilient as they are often newer companies that are more susceptible to changes in the economic climate.

"The policies of the current provincial government coupled with low oil prices have created a challenging business environment. Some of the vacancy in B- and C-class buildings are a result of bankruptcies."