Meanwhile, Back at the Office
Tight as a drum two years ago, Calgary’s office market is suddenly glutted with space, and for landlords it’s only going to get worse
by Terry Inigo-Jones
Indeed, there might be good news for the city. Thanks to the current market conditions, Calgary “is emerging as an investment banking centre,” says Pootmans. The financial services sector is drawn to high-quality, modern downtown office space. Until recently, this has not been available. CED is working on attracting that kind of company to set up offices in Calgary. While he wouldn’t name names yet, Pootmans says: “We are very well positioned in this area. We are very excited by the potential.”
Higher vacancy rates can also be an opportunity for tenants to lock in some good deals. “I think right now is an excellent time for people to look at their business plan, look at their office needs and grab the bull by the horns,” says McKay. “The market is at a pace now where, yes, it’s still slowing, yes, there’s still more vacancy coming to the market, but it’s at such a rate where if you hold off two months, you might not be able to get a substantially better deal than you can today. Back in December [2008], if you held off a month, you might get a substantially better deal.”
Avison Young’s Throndson says tenants are realizing there are opportunities to make some good deals. “We are doing a lot of work with tenants today that don’t have leases coming up for three years or four years, and they are saying now is the time to be dealing with it, because in three or four years, the economy could be back, vacancy could be less, landlords won’t be as fearful, so it’s time to use your leverage today.”
For landlords, though, the picture isn’t as rosy. “There’s one bubble [of new buildings opening] that’s going to happen over the next eight to 12 months. There’s another bubble that’s going to hit in 2011 and 2012,” says Throndson. The second bubble includes the Bow and 8th Avenue Place buildings. “Most of the space that’s contracted for and has been built and [will be] ready for occupancy next year has been leased, but when EnCana moves their 1.5 million square feet or two million square feet in 2011, and one million square feet comes available in 8th Avenue Place, that’s virtually 2.5 million square feet to three million square feet of space that’s going to be available. There are a lot of people that are nervous about that.”
In such a situation, building owners are motivated to find and sign tenants. Rents, until recently the most expensive in the country, are trending downward and landlords are having to get creative with their offerings. This could include being flexible on the length of contracts or offering temporary free rent, improvement allowances, better parking and signage and better options to expand space later.
The last time the city saw vacancy rates as high as is now being forecast was in the early 1990s, a dismal time for office owners and developers across North America as overbuilding and a “jobless recovery” kept vacancy rates high for years. Things don’t look as bad now for Calgary, says Throndson. “In the early ’90s, oil was way, way, way down. Oil is [now] approximately US$70 a barrel and is projected to stay at that level or better for a fairly long period of time. So, a key component of the office market – which is the oil companies – is strong.
“The economy of Calgary is not really changing,” he says. “Where our market really, really needs a bump is on the gas side.” Prices for natural gas have recently been about US$3 per gigajoule. “Half of our market is gas… if gas can get over $4, then I think we’ll be fine. There will be some demand for space from those guys as they start to learn how to make money based on that price.” Whether that $4 target will be reached any time soon is uncertain.
This new, more competitive market place also means that brokers have to work harder. In a tight market, a broker or leasing agent might find only a few options that come close to fitting the needs of a tenant, says McKay. Now, there are likely to be many more options from which to choose and the agent has to research and present them all to the tenant. “The process remains the same,” he says. “The amount of effort to successfully go through the process has increased dramatically.”
Or as Throndson puts it: “You’ve got to get your nose down there and you have got to fight it out.”
Pages: 1 2
Follow Alberta Venture On: