The downtown Calgary office market continues to suffer from soft oil and gas activity and the impact of COVID, according to a new report by commercial real estate firm JLL.
“The vacancy numbers do not yet reflect the full impact of the pandemic. While vacancy rose 20 basis points to 24.8 per cent there is likely another five to 10 per cent shadow vacancy space that will come back to the market as firms face bankruptcy, M&A activity or reconfigure premises to address the new work protocols,” said Leslie Lis, Senior Vice President, Jones Lang LaSalle.
“Calgary’s rental rates are the lowest of any major Canadian market. This continues to drive the ‘flight to quality’.”
He said tenants are relocating to better buildings and better locations for comparable or lower rental costs. The trend is reflected in the Centre Core Class A vacancy rate, which is 18.3 per cent compared to the overall market of 24.8 per cent.
“The third quarter will provide better insight into the short and mid-term effects of COVID. What will be the demand for space as staff re-enter the workplace? How will the workplace change? Open versus office layouts, hub and spoke versus central core, personal commuting versus mass transit?,” added Lis.
In the report, JLL said Calgary’s downtown office market recorded 72,337 square feet of negative net absorption in the second quarter, bringing year-to-date absorption to negative 305,246 square feet. It said average direct asking gross rent for Class A buildings is $35.38 per square foot, Class B is $24.05, and Class C is $19.94 per square foot.
“The downtown market continues to be tenant favourable with its diverse portfolio of direct and sublease space. As the price of oil decreased, downtown oil and gas tenants suffered forced capital expenditure cuts, leading to new job losses,” said the report.
“Class A buildings such as The Bow and First Tower that have large blocks of contiguous space offers companies the opportunity to move headquarters into downtown Calgary. Companies that transition into downtown Calgary can capture both lower rents and robust inducement packages. Out of province companies that move to Alberta as well as those that remain in the province can take advantage of the lowered 8.0 percent corporate tax rate.
“With the volatility of the price of oil, additional vacancy is expected to be added. Tenants will favour extensions and subleases to conserve capital. Downtown head lease rates are expected to stay well below other Canadian markets until oil prices can return to economic levels. We expect that the flight to inexpensive, high quality space will continue in Calgary as tenants can take advantage of this very soft market. It is too early to report the real impact of COVID-19 isolation and forced remote work, but we suspect that this may accelerate the flight to quality as people take advantage of larger floor plates and improved mechanical systems in newer or upgraded buildings in the Centre Core.”