Calgary’s office market has finally returned to positivity

by Steve Randall17 Jan 2019

It’s been four years since the absorption rate for Calgary’s office market was in positive territory but that changed in 2018.

However, the market remains constrained with additional challenges of higher property assessments.

“While 2018 ended on a positive note, the fact that we saw positive absorption in 2018 without seeing any material change in the overall vacancy emphasizes how challenged the Calgary office market has been,” comments Todd Throndson, Principal and Managing Director of the company’s Calgary office.

Both the Downtown and suburban absorption rates have both improved, while the Beltline posted a negative rate.

“Fourth-quarter 2018 resulted in 216,000 square feet (sf) of positive absorption in the Downtown market, which contributed to the 400,000 sf of absorption recorded for all of 2018 in the downtown,” he said. “While it is great to see the direction change from the multi-millionsquare-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.”

Nexen Energy’s relocation to The Bow and Canadian Tire’s consolidation and relocation to the Jacobs Building in Quarry Park were the big stories for the fourth quarter in the Calgary office market.

Property taxes diverging
Throndson says property tax assessments have diverged in the market.

“Average assessments have been decreasing in the Downtown office market over the course of the downturn, currently down $0.77 per square foot across all classes of properties, but more than a dollar for some,” he said. “Meanwhile, the suburban office markets have seen slight increases in average assessments, a little over $0.25 per square foot on average. This tax burden shift is starting to impact gross rentals rates and changing the equation in how tenants consider properties in different areas of the city.”

The retail and industrial sectors are having to carry a heavier share of the property tax burden than they have in the past noted Throndson.

Change in demand
Large tenants are no longer the dominant force in Calgary’s office leasing market.

Generally, the average office tenant has shrunk in size with most deals being completed today involving tenants smaller than 10,000 sf.

This trend is leading landlords to make tough decisions regarding the repositioning of their buildings to attract smaller tenants.

“Landlords and tenants are finding a market that offers both parties a platform for completing deals. Flight-to-quality is expected to be a major component of the market,” concluded Throndson. “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. This ideology is supported by the trend of lower vacancy rates in those buildings considered to be the best in their respective submarkets.”

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