Search this blog:
Follow Avison Young:

Friday, March 23, 2012

Development Commencing in Calgary's Office Market Again

By Walsh Mannas (Calgary)

A new office development cycle has officially started in Calgary, marked by construction commencing at Eighth Avenue Place II (West Tower), as record breaking downtown office leasing activity over the past two years has restored the market to pre-recession vacancy and lease rate levels.

In 2011, 2.4 msf of downtown office was absorbed and vacancy dropped from 10.6% to 4.5%. In the fourth quarter alone, there was 650,000 sf of absorption and a 1.7% drop in the downtown vacancy rate (6.2% to 4.5%). Consistent with previous quarters, most of this leasing activity has been in Class “A/AA” spaces. Class “A” vacancy in the downtown is now 2.5%, and Class “AA” vacancies are virtually non-existent at 0.3%. Scarcity of space in Class “A/AA” buildings is also having an effect on the Class “B” vacancy rate which has been in steady decline over the past year. Only the Class “C’” market has not recovered as dramatically since 2008, with vacancy now at 15.4% having remained in the mid-high teens since 2009.

The flight to quality trend continues to shape Calgary’s office leasing market and has prompted a new development cycle. Eighth Avenue Place II (West Tower), Eau Claire Tower, Herald Block and City Centre would add a combined 3.3 msf to the downtown market over the next five years and have a relevant impact on vacancy.

Calgary’s downtown office leasing market is tightening at a pace that surpasses the 2004 to 2007 levels. This tightening has naturally renewed interest in the development market for a number of new Class “AA” towers. Analogous to 2004 when Livingston Place, Centrium Place and OPUS 8 were announced as potential developments, Calgary’s downtown market is void of new office development in the core for the next 30+ months. As such, our opinion is that we are in the early stages of a notably increasing lease rate environment.

Historic Review of 2004 & 2007 Office Markets in Calgary

One of the most telling metrics out of the highlights listed on the chart above are the energy land sales numbers. 2004 was the first time since 2000 that energy land sales (excluding oil sands land) grossed more than $1B in revenues for the Alberta Government. In the following two years this level of investment was exceed by a $1.8B year in 2005 and a $1.4B year in 2006. As land leases purchased from the government must be proven (drilled and put into production) in a 2-5 year period (depending on the area in Alberta the land was leased in) the land purchased in 2004 to 2006 put in motion the massive expansion seen in Alberta’s energy sector thereafter.

Of course the expansion seen in Alberta’s energy sector was dampened both by the Government of Alberta’s royalty review in 2007 which drove a number of key producers into British Columbia and Saskatchewan, and by the global financial crisis.

Looking forward we feel that the energy production land purchased in 2010 and 2011, which set all time record highs in terms of total investment dollars and total hectares purchased, will keep activity levels in the province of Alberta strong through the next five years, possibly outpacing what we have seen in recent cycles because of favorable oil prices and a stable royalty system.

One major difference between recent cycles and today that cannot be overstated is the market value of crude oil. At today’s prices both exploration and development of existing leases is viable because we have oil prices stabilizing at above $90 a barrel, which is a roughly $20 per barrel cushion above the breakeven point of the more expensive oilsand plays in Western Canada. Compared to 2004 when Calgary’s downtown office market was tightening with $44.09 per barrel oil we feel that the next three to four years will provide for a much tighter and more robust office leasing and development market.

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.