Vacant skyscrapers are an ‘albatross’ that Canada’s oil capital can’t shake off too soon

Original source

Naheed Nenshi was first elected mayor of Calgary in 2010 when the iconic Bow tower was rising to re-top the city’s skyline, new companies were opening their doors, established ones were expanding and luxury retailers were setting up shop.

Office vacancy in the city’s bustling core was so tight, “You couldn’t get space downtown for love or money,” Nenshi recalled.

To fill the gap, skyscrapers were rapidly built — 10 million square feet between 2007 and 2016 — all underpinned by confidence in the future of Alberta’s oilsands and a business-friendly climate.

But the expansion of Calgary’s commercial core, home to Canada’s second-largest concentration of head offices after Toronto, came to an abrupt halt when oil prices collapsed in late 2014. The fallout worsened as new governments muscled in with policies to accelerate the transition to green energy.

Massive layoffs, bankruptcies, consolidation and an efficiency drive at the oil and gas survivors reduced the downtown workforce by 40,000. Put another way, one in four Calgary office workers — and their workspaces — were no longer needed.

Related Commercial rents in Toronto could soar as much as 50% in the next three years as market tightens

Rachel Notley says moving part of the National Energy Board to Ottawa would be ‘dumb’

Allied Properties REIT target price boosted with Toronto office market showing “strong fundamentals”: Desjardins analysts

Calgary’s office vacancy rate is so large that it’s become an albatross with implications for developers, city finances and, ultimately, taxpayers. “We went from essentially zero to almost 30 per cent (vacancy) in about 18 months,” Nenshi said. “I love roller coasters, but this is too much. The recovery will not be that quick. It’s going to be more slog work.”

Both Barclay Street Real Estate and Avison Young put the vacancy rate at 24 per cent, but it’s closer to 30 per cent for older buildings and projected to rise to 27 per cent later this year and remain high in 2018.

It’s estimated there is 13 to 14 million square feet of vacant space within Calgary’s striking cluster of glass towers. That’s equivalent to all the office space in downtown Vancouver.

Many skyscrapers, including the Bow, have completely empty floors. In others, just a handful of people occupy space where hundreds used to toil.

It will take such a long time to refill that space and Calgary may not see a new tower constructed until 2029, according to a study by the Conference Board of Canada.

As bad as it is, the vacancy rate is expected to swell even more in the next two years as three new buildings under construction are completed: a 564,000-square-foot building by Manulife is nearly ready; Brookfield Place, at 1.4 million square feet, is due to open this summer; and Telus Sky, at 430,000 square feet, is scheduled for 2019.

“The decisions to build these building at the time were the right decisions,” said Greg Kwong, regional managing director, Alberta, at CBRE Inc. “We needed the space.” Then, he said, oil prices collapsed, government priorities changed, “and the music stopped.”

Although office space is increasingly pricey in other Canadian cities, particularly Toronto, lease rates in Calgary have plummeted by 75 per cent at some places to $10 to $15 a square foot on a five-year lease for the highest-quality space, from a peak of $40 to $45 in 2013, Kwong said.

Landlords are offering bargains galore, such as free rent for a year in exchange for long-term commitments and free upgrades at the most luxurious addresses such as new carpets.

One landlord, Aspen Properties Ltd. executive chairman Scott Hutcheson, inspired by Silicon Valley campuses, is renovating one of the emptiest buildings — Encana Place, with a vacancy rate of 62 per cent — to attract more tech companies that employ millennials by adding a dog park, basketball courts, gym facilities and a putting green.

There was a time when Hutcheson wondered “if we were just too risky” in spending millions to renovate during a period of high vacancy, but he said the strategy is paying off. New tenants are moving in because “this building is uniquely positioned in the market.”

Another landlord, Centron Group, paused construction of an office tower just outside downtown on 10th St. and is considering redesigning the building to house condos. And Brookfield Asset Management Inc. put a second planned tower for Brookfield Place on hold.

No one expects the remaining energy companies, including the handful that have become giants by acquiring the assets of competitors who left the city, will need more room in the future because they want to keep their costs in check.

You will see companies that take 50,000 square feet right now (that) might take only 45,000 because they will become more efficient as technology takes over,” Kwong said. “I have been told by people in the industry, ‘We don’t need 10 engineers to drill a well any more, we only need five and a software program.’”

TransCanada Corp. and MEG Energy Corp. have put large blocks of space up for lease. Cenovus Energy Inc. has also tried to sublease space as it concentrates multiple locations into two towers. The company leased 71 per cent of Brookfield Place when times were good and is due to move in sometime in 2019, but the building likely won’t be full when it opens.

In response, the city has launched a multi-pronged effort to attract new companies before it falls behind like a rust-belt city.

“My job is to continue to win back that business one square foot at the time and see how we do,” Mayor Nenshi said. “In Alberta, when times are good, we sometimes lose the discipline to be creative and innovative to solve our various business issues.”

Nenshi, who is up for re-election this fall, said future tenants of Calgary’s office towers will likely be smaller firms such as Nubix, a local tech startup that would have been priced out of the city’s centre in the past but which recently signed a lease for 2,000 square feet.

There are also new junior oil and gas startups subleasing space from exiting oil majors on the cheap, as well as educational institutions such as SAIT Polytechnic that are moving classes downtown.

“In the listings that I have, and the tenants that I have looking, there are a ton of guys looking for space under 5,000 square feet,” said Dan Harmsen, vice-president of Barclay Street Real Estate. “That has historically been the beginning of new growth.”

Calgary Economic Development chief executive Mary Moran is leading the charge to re-populate the downtown, which she believes will require a “conversion” from a major oil centre into a more diversified hub of clean tech, financial services and Internet-related companies attracted by the city’s unique network of indoor bridges known as the Plus15 system.

The bridges connect most of the skyscrapers downtown and were built to address the Canadian oil and gas sector’s practice of having frequent meetings.

Moran and her team have been to Silicon Valley six times this year, pitching companies in growth mode on Calgary’s more affordable office space, available workforce, proximity to the Rockies and the two-hour-long direct flights.

In addition, U.S. President Donald Trump’s policies that make travel difficult for some employees mean there is demand for “a safe haven to put people, particularly coming from India, the best engineers in the world, who can’t get in and out of the U.S. very easily,” Moran said.