Feb. 07, 2017 | CREBNow

Calgary's immovable skyline

No new downtown office towers for at least five years, say experts

Despite the number of construction projects currently on the go, it is unlikely Calgary's downtown office market will see any new towers for quite some time.

Todd Throndson, managing director and principal for Avison Young in Calgary, says the millions of square feet of recently created new space, three new towers coming on line and a soaring vacancy rate will sideline any plans for more towers.

He says it will take several years – at least five – before the existing vacancy will be absorbed and a landlord will be prepared to take on the risk of constructing a new tower. Today, Calgary's vacancy rate is about 25 per cent.

"Typically speaking, landlords will start looking at new construction when vacancy gets to about five per cent," he said. "It's mostly determined by rent and by an existing tenant who steps up and decides they want a new building."

Throndson points to three new buildings under construction as examples.

"707 Fifth was a build-to-suit effectively for Brion Energy. Manulife didn't go ahead until they had that lead tenant. Brookfield (Place Calgary – East) had a deal done with Cenovus. Telus Sky had a deal done with Telus," he said.

Because they're so big and expensive, most new construction buildings downtown won't start unless they have a lead tenant to start the project off, says Throndson.

Tenants don't typically look to build new unless there's no suitable space available in the market and rental rates are high enough as to make it a sound business decision, he adds.

"Typically speaking, landlords will start looking at new construction when vacancy gets to about five per cent."

Todd Hirsch, chief economist with ATB Financial, says he also doesn't expect any new major downtown office towers to be built for another five years.

"We're going to have so much inventory and a lot of vacancy for a long time,'' he said. "But it's not really unusual to see Calgary go through a building spurt, and then a long period of no new projects."

Hirsch says the current overbuild real estate environment is very similar to Calgary in the '90s, just after Bankers Hall and what is now the Devon Energy tower were built.

"... In the early 1990s, there was another bust and there was a lot of vacancy," he said. "What we're seeing now is the same kind of pattern, but just on steroids. Its order of magnitude is more this time."

Throndson says there may be another three months left of negative absorption – the change in occupied space – in the downtown market. This will be followed by a flat period for leasing, with 2018 becoming a bit of a question mark and growth coming back in 2019, he says.

Calgary's downtown vacancy rate is set to only go up in the near future because of three new buildings coming onto the market over the next two years.

According to Avison Young, 707 Fifth (564,350 square feet) is expected to be completed in the first quarter of this year; Brookfield Place (1.4 million square feet) is expected to be completed in the fourth quarter; and Telus Sky (459,936 square feet) is expected to be completed in the fourth quarter of 2018.

Tagged: Commercial | Commercial | Downtown Calgary Office Space