There’s a glimmer of hope in Calgary’s downtown office market after the first positive annual absorption in four years was recorded in 2018.
Avison Young released its fourth quarter 2018 Calgary Office Market Report and overall vacancy rate in Calgary’s downtown was its lowest in two years (24.7 per cent) at the end of Q4, down from 25.2 per cent in the third quarter of 2018.
The peak vacancy, according to Avison Young, was 26.4 per cent in Q2 2017.
The positive absorption rate, which is calculated by deducting overall commercial space vacated by tenants from total space leased by other tenants, was sparked by 216,000 square feet absorbed in the last quarter, which led to an overall 400,000 square feet for all of 2018.
“While it is great to see the direction change from the multi-million-square-foot-negative-absorption years of 2015 and 2016, the increase has not been material enough to instill the confidence needed to boost the outlook in Calgary,” said Todd Throndson, Principal and Managing Director of Avison Young’s Calgary office.
The report did say there are still some headwinds facing Calgary’s downtown market. First, Telus Sky is set to open in Q1 2019 and Avison Young predicts downtown vacancy will rise as high as 26.3 per cent with the addition. With further layoffs in the energy sector, Calgary could still see its highest vacancy rate ever, the report said.
They believe many companies are taking a wait-and-see approach to making decisions on office space, primarily due to upcoming provincial and federal elections.
Property taxes are also an area under close watch, said Throndson. He said that with the tax burden shifting to suburban markets, potential lessees are being more selective where they’re setting up shop.
Outside of the downtown, the Beltline saw a small negative absorption in 2018 (87,000 SQF), but it was better than the negative 214,000 sqf seen in 2017. Both suburban north and south areas saw exceptional growth in leased space over 2017, with the south seeing the best performance, mainly due to Canadian Tire’s consolidation, Throndson said.
Trends are showing that large tenants no longer dominate Calgary’s office leasing, with the most deals being done for spaces under 10,000 square feet, Throndson said. To accommodate, some building operators are tailoring their spaces to bring in smaller operations.
“Landlords and tenants are finding a market that offers both parties a platformfor completing deals. Flight-to-quality is expected to be a major component of the market. With rental rates and inducements being attractive, tenants are showing a strong interest in moving into better-quality buildings while keeping their cost structure stabilized.” Throndson said.