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Monday, May 9, 2011

Energy Prices and the Calgary Office Market

By Walsh Mannas (Calgary)

The Calgary office market continued the recovery witnessed in 2010 with a strong first quarter. The overall vacancy rate in the city has declined from 10.6% in Q4 2010 to 9.8% in Q1 2011. According to a report published by RBC Economics, real GDP growth is estimated to be 4.3% in 2011 for Alberta, the best since 2006. The report also forecasts nearly 50,000 net new jobs to be created for the province in 2011, the highest since 2007. All of the aforementioned market factors will keep the recovery moving but our focus will remain on energy prices as we forecast just how strong the recovery will be.

With unrest in the Middle East, crude oil prices have spiked dramatically in recent months. What may further affect pricing is instability spreading to oil rich countries such as Iran and Saudi Arabia. Combined with the growing energy needs of emerging economies such as China, the abundance of untapped oil supply in Alberta appears increasingly attractive to global oil companies. This has been reflected in positive absorption of downtown office space of 375,000 square feet through the first quarter of 2011. The vacancy rate including sublet space for both class AA/A office space in the downtown core has decreased from 8.2% and 8.0% respectively for Q4 2010, to 5.9 % and 7.5%. Dominated primarily by oil and gas energy companies, improved economic conditions and a very positive outlook on energy pricing, tenants have strong confidence to expand and take on additional space.

Although strong energy pricing bodes well for many Alberta companies, there is an economic reality that will complicate the economic recovery if energy prices continue to rise: higher energy prices equate to lower consumer spending. Bloomberg Businessweek recently ran an interesting article which detailed the comparison between gasoline prices and job growth in America. The economic reality is that as gasoline prices rise consumers have less money to spend elsewhere in the economy. As consumers rein in their spending fewer jobs are created which further stymies the fragile economic recovery. The full Bloomberg Businessweek article can be read here.

Avison Young's complete first quarter Calgary Office Market Report can be accessed here.

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