Calgary Office Market Report

Second Quarter 2018 / Office Market Report Calgary

Quick Stats

Calgary: An emerging small tenant those properties to attract the active part of 23.5% market the leasing market. Calgary Overall Vacancy For the time being, large — 100,000 square This repositioning of assets requires capital foot (sf) and greater — tenants are not injections into improving building common the dominant force in Calgary’s office areas, amenity spaces, demising floors for 26.0% market. Entering the Calgary office market’s multi-tenant purposes, separating HVAC and possibly fourth year of negative absorption, mechanical, and the marketing strategy of Downtown Vacancy significant changes have occurred in building show suites. While these costs are the market. One of the biggest changes significant to landlords, they are a necessity observed in the last year is the dominance to maintain the viability of their buildings. 19.5% of deals being completed under 5,000 sf. Even further, landlords are having to accept shorter term deals, making it difficult to Beltline Vacancy This observation, combined with the volume of sublease space on the market from rationalize these costs on a net effective larger tenancies, strongly underlines the basis. However, these investments will presumption that the average office tenant improve the likelihood of the space being 17.4% in Calgary has shrunk significantly in size. leased in the current market — a definite Suburban North Vacancy improvement over leaving space vacant — Landlords of class B and older class A and increase the potential for renewals on a buildings are feeling the impact of this more preferential basis down the road. shift to smaller tenancies the most. A lot of 22.1% these landlords previously enjoyed full floor The May 2018 Business Barometer Index, a Suburban South Vacancy and multi-floor tenancies. However, due to confidence survey regarding Alberta-based the downturn in Calgary’s economy these businesses, from the Canadian Federation of tenants have retreated in size and activity. Independent Businesses (CFIB) is showing This is challenging landlords to reposition that the sentiment towards business growth

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in the next six months is lukewarm. The was in late 2014 at its peak. In terms 39%) below WTI in first quarter 2018. survey indicates equivalent numbers of of the unemployment rate, recovery While WTI benchmark prices continue companies are saying they are planning does not occur in a straight line, but to strengthen and perform well from to hire staff or layoff staff and are the general trend has been downwards a global market perspective, WCS seeing the general state of business as over the last year. The unemployment differentials widened as a result of either good or bad. Of interest is that rate for May 2018 decreased to 7.7%, increasing inventories and the inability more than half of the small-to-medium from 8.0% in April 2018, and is down to increase exports to markets other enterprises are responding they are from 9.3% 12 months ago in May 2017. than the U.S. With the recent federal neutral on these two questions. In other Calgary’s unemployment rate remains government investment in the Trans words, they anticipate remaining status distant from the low of 4.4% recorded Mountain Pipeline, some of the quo on hiring and don’t expect to see in November 2014, but is well below uncertainty has been resolved on much change in their business in the the peak unemployment rate of 10.3% the project, but until construction is near term. which was recorded over a year ago in substantially underway, uncertainty November 2016. will remain. In order for Calgary’s The City of Calgary’s predominantly energy-based economy Corporate Economics Getting oil to tidewater is one of the to get back into firm growth mode, 23.5% group recently largest issues hanging over Calgary’s OVERALL OFFICE solutions to the ongoing pipeline VACANCY RATE published their economic recovery. Oil prices for bottleneck need to be found. Spring 2018 Calgary West Texas Intermediate (WTI) have and Region Economic been above US$60 a barrel since Calgary’s business community appears Outlook 2018-2023. Calgary is expected late December. However, Alberta to be in a holding pattern until a to experience modest economic growth oil continues to trade at a discount. substantial indicator of change is throughout the forecast horizon, with Western Canadian Select (WCS), which witnessed. As a result, smaller tenants Gross Domestic Product (GDP) growth is the benchmark price for much of will continue to be the dominant of 2% expected. This level of GDP the crude oil in Alberta, had a price participants in the Calgary office leasing growth is well below the high levels differential of US$24.28 a barrel (or market. of growth (4-6%) Calgary was used to experiencing prior to the downturn. This HistoricalHis Pricetorical Pofric Oile of VersusOil versu Calgarys Calgary DDowntownowntown Off iOfficece Vacan Vacancycy Rate Rate slower rate of growth is a big part of $160 30% why the Calgary economy feels sluggish. Source: U.S. Energy Information Administration, Avison Young

Calgary is used to a much faster paced $140 economy and the adjustment to current 25% growth levels is challenging. $120 ) l 20% e

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the downturn. In May 2015 Calgary’s S

$60 I T 10% employment peaked at 826,000 people W before beginning its downward slide $40 through the downturn. As of May 5% 2018, Calgary’s employment is 841,100 $20 people (15,100 people above that previous peak). The other interesting $0 0% 0 1 2 3 4 5 6 7 8 9 0 1 2 4 5 6 7 3 0 1 2 3 4 5 7 8 9 0 1 2 3 4 5 6 7 8 6 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 0 1 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 ------y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y l l l l l l l l l l l l l l l l l l r r r r r r r r r r r r r r r r r r r u u u u u u u u u u u u u u u u u u a a a a a a a a a a a a a a a a a a a observation from Stats Canada is that J J J J J J J J J J J J J J J J J J u u u u u u u u u u u u u u u u u u u n n n n n n n n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a average weekly earnings for employees J J J J J J J J J J J J J J J J J J J WTI Monthly Spot Price Calgary Downtown Office Vacancy Rate in Alberta is virtually back to where it WTI Monthly Spot Price Calgary DT Office Vacancy Rate

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Calgary Overall positive absorption in second quarter the last few quarters there is more 2018 was the Suburban North, a direct information available to accurately ABSORPTION VACANCY RENTAL result of the fully pre-leased, build-to- identify what range rental rates should (DEMAND) (SUPPLY) RATES suit Hexagon Calgary Campus building fall within, thanks to a larger number of being added to inventory. Meanwhile, transactions, each of the Downtown, Beltline, and The Calgary office market appears to Suburban South office submarkets Quoted taxes and operating costs have found its bottom. Vacancy has saw negative absorption in second average $17.48 per square foot (psf) for moved around within a very narrow quarter 2018. The 5-year average all building classes, across the entire 40 basis point range over the last five annual absorption for Calgary’s overall city. Class AA buildings average $23.05 quarters. Similar to many companies, office market is negative (-1,245,000 psf, class A buildings average $18.40 the Calgary office market seems to be sf) per year and the 10-year average is psf, class B buildings average $16.68 psf, taking a wait and see approach. The 284,000 sf per year. Over the past five and class C buildings average $14.29 overall vacancy rate increased to 23.5% years, office occupancy has dropped psf. These numbers are further broken during the second quarter of 2018 from 3.6 million square feet (msf), while down within the specific area of city 23.2% in first quarter 2018, and remains new construction has added 10.3 msf. sections later in this report. However, it even with the vacancy rate recorded 12 This dramatic shift helps to present the is important to note that assessments months ago in second quarter 2017. picture of why Calgary is in such a high for office properties are seeing a vacancy market. divergence. Average assessments have Across the entire Calgary office market, been decreasing in the Downtown and headlease space (space available For the time being, 74% Beltline office markets over the course directly from the landlord) currently the range for average HEADLEASE of the downturn, while the suburban represents 74% of Calgary’s overall SPACE asking rents is (ALL CALGARY) office markets have seen slight increases availability, in comparison to 69% 12 remaining stable. While in average assessments. As a result, months ago. the average asking rate adjustments to taxes and operating has not seen much movement over costs have been recorded. Due to the Large, contiguous blocks of office space continue to stand out in the market analysis. Contrary to the prevailing Calgary CMA Employment and Unemployment Rate beliefs, these blocks are available 850,000 12.0%

predominantly on a headlease basis. % % 3 % . 2 . 1 0 . 0 1 % 0 1 9 1 10.5% Large block space, defined as one 840,000 . % 9 6 % . % 4 9 % % % . 3 . 2 2 2 9 % . . . 9 contiguous availability over 100,000 % 0 9 9 9 % . 9 % . 8 9 . 7 8 % % . 8 5 5 8 830,000 . . 9.0% square feet (sf) in the Downtown 8 8 % % 6 . 9 . ) 7 8 % market, or over 30,000 sf in the Beltline e % l % % 5 0 % . % p 4 4 . % % . . 8 8 % 8 o 7 . 2 . 8 8 8 % . . 1 % e % 6

. 7.5% 820,000 6 0 8 6 . 9 P % 7 8 % %

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8 % % 6 f 7 7 7 % . 6 . . 6 4 o . . 5 6 7 7

. 7 6 r % 7 e 0 % represent between 18% and 62% of . b 8 6 . % 5 m 5 .

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the vacancy for their respective market ( 0

. t 5 n % e 5 . 4 segments and 35% of the city-wide m y o

l 800,000 4.5% vacancy. p m E

Absorption for the overall Calgary office 790,000 3.0% market returned to a negative position 780,000 1.5% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 in the second quarter of 2018, with 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 6 6 0 0 6 7 7 9 1 0 6 5 1 4 3 3 3 7 9 5 7 1 1 5 1 0 3 4 4 0 9 1 9 5 9 7 1 2 3 4 , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , 6 8 0 5 6 3 7 6 7 5 0 2 8 8 2 2 9 3 4 6 1 6 3 8 9 0 7 3 7 3 0 8 4 0 4 2 1 1 9 2 7 1 1 2 2 2 2 1 1 1 1 1 0 9 9 0 0 9 9 9 9 0 0 1 1 1 2 2 3 3 3 3 2 3 4 4 4 4 4 negative (-231,000 sf) being absorbed, 1 2 3 8 8 8 8 8 8 8 8 8 8 8 8 7 7 8 8 7 7 7 7 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 770,000 0.0% 5 6 7 5 6 7 8 5 6 7 7 5 6 7 7 5 6 7 8 5 6 7 8 5 6 8 5 6 7 5 6 8 5 6 7 7 5 6 undoing the positive absorption 5 6 7 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------l l l r r r r r r r r t t t y y y y c c c v v v n n n n n n n g g g p p p b b b b u u u a a a a c c c p p p p a a a a e e e o o o a a a a e e e e e e e u u u u u u J J J J J J J J J J O O O A A A A F F F F S S S M M M M D D D N N N A A A recorded in the first quarter of 2018. M M M M The only submarket in Calgary to see EmploymentEmployment UnemploymentUnemployment Rate Rate Source: Statistics Canada

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Overall Calgary Office Vacancy high levels of vacancy in the central As Calgary’s downturn settles into Rates areas of Calgary, the tax burden has a flat market, it is expected that a been shifting somewhat to suburban flight-to-quality will prevail. Flight-to- Overall Calgary Office Vacancy Rates 30% properties. quality is where tenants move away from lower-quality buildings (typically There were two new buildings 26.0% class B and C buildings) and move to 25% completed in second quarter 2018, 23.5% higher-quality properties (typically 22.1% Hexagon Calgary Campus at 10921 – 6.83% class A and AA buildings) at the same

6.17% 14th Street NE (160,000 sf), which was 20% 19.5% or lower cost structure to their current 5.76% fully leased at the time of completion, 17.4% lease commitments. This can already be and Mount Royal West at 1508 – 8th 6.58% 3.31% seen with lower vacancy rates for those 15% Street SW (28,000 sf), which was also buildings considered to be the best in fully leased at the time of completion. their respective submarkets. Approximately 540,000 sf of new 10% 19.14% 17.35% 16.34% office space, in four buildings, remains Downtown 14.06% 12.89% under construction across Calgary, 5% with 37% pre-leasing in place. The ABSORPTION VACANCY RENTAL (DEMAND) (SUPPLY) RATES majority of this is in Downtown (85%),

0% followed by the Suburban North (9%), Downtown Beltline Suburban Suburban Overall North South and Suburban South (6%). There are Headlease Vacancy Sublease Vacancy Total Vacancy no office properties remaining under The Downtown Calgary office market construction in the Beltline. Very little has found its bottom and appears to be new construction is anticipated to be sitting there for the time being. In the announced in the city for several years, last 15 months the vacancy has moved Calgary Annual Absorption by given the widespread availability across around within an 80 basis point range. Area of City the entire Calgary office market. Downtown Calgary office vacancy, as of second quarter 2018 is 26.0%. This

Calgary Annual Absorption by Area of City While energy and energy servicing is up from 25.6% in first quarter 2018, 200,000 companies continue to make up a but down from 26.4% 12 months ago 137,000 large share of the leasing transactions 95,000 in second quarter 2017, when vacancy 100,000 53,000 being recorded, growth from areas peaked for this downturn. Total vacancy such as information and technology, for the Downtown office market is 0 -19,000 not-for-profits, government, business 12.0 msf, broken down by: 8.8 msf of services and green technology are -100,000 -89,000 headlease space (74%) and 3.2 msf of -120,000 definitely being noticed. In addition, sublease space (26%).

-200,000 activity by smaller tenants is growing -189,000 -194,000 -214,000 noticeably. Demand for space under Vacancy by class is now: class AA

-300,000 5,000 sf continues to be high and –23.3%, class A – 24.5%, class B – 33.7%, landlords are reacting by taking their and class C – 20.5%. Of note, the -400,000 larger contiguous areas and dividing middle-class buildings (low class A and them into smaller pockets of space. It the entire class B market) appear to -500,000 -502,000 is expected that rental rates will remain be experiencing the highest levels of competitive and inducements (such as loss, while those properties at the top -600,000 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 free rent and improvement allowances) and bottom of the quality spectrum Downtown Beltline Suburban Suburban Overall North South will be substantial in many cases. (class AA, good quality Class A and class C) are seeing improvement in

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Downtown Calgary Office their occupancy. This is indicative of Average asking rents for headlease Vacancy Rates the flight-to-quality into AA and good space in Downtown are remaining quality A buildings and the strong small steady and range between $4 and Downtown Calgary Office Vacancy Rates 35% 33.7% tenant start up market that is being $36 per square foot, per annum. New

2.82% observed in the C Class market. Construction buildings range between

30% $28 and $36 psf (average $32 psf). Second quarter 2018 saw positive Class AA buildings range between 26.0% absorption for class AA buildings 25% 24.5% $22 and $26 psf (average $24 psf). 23.3% continue for the second quarter in 6.83% Class A buildings range between $13 20.5% a row and third quarter in a row for 7.21% and $17 psf (average $15 psf). Class B 20% 0.88% class C buildings. Over the last three 9.95% buildings range between $8 and $12 months, class AA buildings saw positive 30.86% psf (average $9 psf). Class C buildings 15% 107,000 sf absorption, class A saw range between $4 and $7 psf (average negative (-367,000 sf) absorption, $6 psf). Location, building quality, size 10% 19.58% 19.14% class B saw negative (-130,000 sf) 17.26% of space, and length of term will all play absorption, and class C saw positive 13.36% into ultimately determining what the 5% 101,000 sf absorption. Absorption in asking rate for a property is. Sublease the Downtown office market for second opportunities can offer substantial 0% quarter 2018 overall was negative Class AA Class A Class B Class C Overall discounts from these rates and vary (-290,000 sf). This is a noticeable step Headlease Vacancy Sublease Vacancy Total Vacancy widely. back for a market that had seen a slight positive absorption market over the Similarly, quoted taxes and operating previous nine months. costs average $20.46 psf for all building

Downtown Calgary Office Market Average Asking Rents Downtown Calgary 5-Year and 10-Year Average Annual Absorption Downtown Calgary 5-Year and 10-Year Average Annual Absorption Downtown Office Market Average Asking Rents Headlease - High-Low-Average - ($/SF/Annum) 3,000,000

$40.00 2,407,000

2,088,000 2,000,000 $35.00

$32.00 10-Year Annual Average Absorption -162,000 sf per year $30.00 1,000,000 557,000 560,000 $25.00 376,000 $24.00

0 $20.00 -120,000 -189,000

$15.00 $15.00 -1,000,000 -786,000

-1,360,000 $10.00 $9.00 -2,000,000 $6.00 $5.00 -2,205,000 5-Year Annual Average Absorption -1,289,000 sf per year -3,000,000 $0.00 New Class AA Class A Class B Class C -3,068,000 Construction

-4,000,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Downtown Calgary Office Historical and Projected Vacancy Downtown Calgary Office Historical and Projected Vacancy REASONABLE ASSUMPTIONS: 30% 2018: Positive 100,000 sf 27.1% 27.1% 27.1% 27.1% 27.1% 27.0% 26.9% 26.7% 26.5% 26.4% 26.0% 26.2% 25.7% 26.0% 25.6% in each of Q3 and Q4

25% 26.0% 26.3% 25.9% 23.9% 23.9% 25.6% 25.7% 25.6% 25.3% 25.0% 22.9% 24.7% 24.3% 2019 and beyond: 24.0% 23.7% 21.1% Positive 150,000 sf in 20% each quarter

17.6% 16.3% PESSIMISTIC ASSUMPTIONS:

15% 2018: Negative 100,000

12.2% ) f s sf in each of Q3 and Q4 0 )

10.7% 0 f 0 s ,

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10% 0

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5% l o 4 6 y ( T P

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( in each of Q1 and Q2, y e

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i f l r f i S positive 100,000 sf in k a C F

o g l L u 7 o a E a r 0 T E C 7 B each of Q3 and Q4 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2015 2016 2017 2018 2019 2020

Vacancy Rate - Reasonable Assumptions Vacancy Rate - Pessimistic Assumptions Vacancy Rate - Reasonable Assumptions Vacancy Rate - Pessimistic Assumptions

classes, in the Downtown market. Class The last remaining office building under rise to 26.3%, remaining below the peak AA buildings average $23.05 psf, class construction in downtown Calgary value recorded in 2017. A buildings average $20.25 psf, class B is TELUS Sky. It contains 460,000 sf of buildings average $17.34 psf, and class new office space, which will result in Beltline C buildings average $15.57 psf. These a 1% increase in inventory, and is 39% average rates for taxes and operating pre-leased - with less than a year to go ABSORPTION VACANCY RENTAL (DEMAND) (SUPPLY) RATES costs have decreased as properties before occupancy starts to take place. adjust to their 2018 assessed values, As a result of the current economic which have seen dramatic decreases conditions and weak demand for space on average versus previous years ¬– a no new development is expected to be The vacancy rate in the Beltline office direct result from rents decreasing and announced in Calgary’s downtown core market increased again to sit at 19.5% their impact on the valuations of office for several years. in second quarter 2018. This is up from buildings. The current realistic prediction is that 18.5% in first quarter 2018, and from There are 15 availabilities on the market absorption will be positive 100,000 sf 16.9% 12 months ago in second quarter in Downtown Calgary that have over in each of Q3 and Q4 2018, and rising 2017. This is a new peak vacancy for the 100,000 sf available as one contiguous to 150,000 sf per quarter in 2019 and Beltline office market, exceeding the block. These 15 blocks of space beyond. These reasonable assumptions previous peak of 19.1% recorded in third represent 31% of the total availability continue to indicate that Q2 2017 was quarter 2016. of space in the Downtown market the peak vacancy for this downturn at Headlease space decreased by 5,000 and 75% of this space is available on a 26.4%. With the addition of TELUS Sky in sf, while sublease space increased by headlease basis. a few quarters, vacancy is forecasted to 103,000 sf during the last three months.

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This increase in sublease space was Beltline Calgary Office primarily the result of the entire 78,000 Baytex energy | q1 2018 Vacancy Rates sf Citadel West (540 – 12th Avenue SW) heavy oil pricing update Beltline Calgary Office Vacancy Rates building being brought to market by CLICK HERE 25% CH2M Hill. Total vacancy for the Beltline 22.4% office market is 1.6 msf, broken down by: 1,079,000 sf of headlease space 20% 19.5% Similarly, quoted taxes and operating 5.75% 18.2% (66%) and 551,000 sf of sublease space costs average $17.99 psf for all building (34%). classes, in the Beltline market. Class A 15.2% 6.58% 0.00% buildings average $19.42 psf, class B 15% Looking at the breakdown between buildings average $17.29 psf, and class 10.75% building classes, second quarter 2018 C buildings average $16.36 psf. saw negative absorption for class A and 10% B buildings and positive absorption for There are six availabilities in Beltline 16.63% 15.21% class C buildings. Over the last three Calgary with more than 30,000 sf 12.89% months class A buildings saw negative available as one contiguous block. 5%

7.47% (-49,000 sf) of absorption, class B saw These six blocks of space represent 18% negative (-13,000 sf) of absorption, of the total availability of space in the and class C saw positive 3,000 sf of Beltline office market and 30% of this 0% Class A Class B Class C Overall absorption. Vacancy by class is now: space is available on a headlease basis. Headlease Vacancy Sublease Vacancy Total Vacancy class A – 18.2%, class B – 22.4%, and class C – 15.2%. No new projects commenced in second quarter 2018. The one remaining project Absorption in the Beltline office market that was under construction was Beltline Calgary Office Average for second quarter 2018 was negative completed, Mount Royal West, which Asking Rents (-60,000 sf). This is the sixth consecutive comes onto the market fully leased.

Beltline Office Market Average Asking Rents quarter of negative absorption for Headlease - High-Low-Average - ($/SF/Annum) the Beltline office market. The 5-year $30.00 Beltline Calgary Annual Office average annual absorption for the Beltline office market is 112,000 sf per Absorption

$25.00 year and the 10-year average is 174,000 Beltline Calgary Annual Office Absorption sf per year. 1,200,000 $22.00 1,063,000 $20.00 Average asking rents for headlease 1,000,000 space in the Beltline range between $5

800,000 $15.00 and $26 per square foot, per annum. $14.00 Class A buildings range between $18 and $26 psf (average $22 psf). Class B 600,000 $10.00 $10.00 buildings range between $12 and $16 400,000 psf (average $14 psf). Class C buildings $5.00 range between $5 and $12 psf (average 200,000 $10 psf). Location, building quality, size 16,000 $0.00 of space, and length of term will all play 0 Class A Class B Class C -80,000 into ultimately determining what the -89,000 asking rate for a property is. Sublease -200,000 -214,000 opportunities can offer substantial -400,000 discounts from these rates and vary 2014 2015 2016 2017 2018 widely.

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Calgary Q2 2018 Office Construction Summary

DOWNTOWN Under Construction