Calgary Office Market Report

First Quarter 2019 / Office Market Report Calgary

Quick Stats Calgary office market sees best to slightly positive results are being seen. positive absorption trend in over Calgary remains set back from the strong three years economy seen prior to 2015, but the market 22.6% doesn’t appear to be getting any worse for Calgary Overall Vacancy Stability and even a bit of improvement over the time being. last year. As of first quarter 2019 the overall Calgary’s overall employment has fully Calgary office market has recorded is third recovered from the losses incurred over consecutive quarter of positive absorption, the course of the downturn. In May 2015 25.3% something the market hasn’t seen since Calgary’s employment peaked at 826,000 Downtown Vacancy 2014. This positive trend carried through to people before beginning its downward the Downtown office market, which also slide through the downturn. As of February saw its third consecutive quarter of positive 2019, Calgary’s employment is 849,300 absorption, a trend not seen in that market 19.5% people, a new peak value and 23,300 people segment in seven years. The last time this Beltline Vacancy above that pre-downturn peak. In terms type of trend was seen in the Downtown of the unemployment rate, recovery does market was the first three quarters of not occur in a straight line, but the general 2012, seven years ago, when the market trend for the last year has been pretty flat. was finishing a run of twelve consecutive 17.1% The unemployment rate for February 2019 quarters of positive absorption. Suburban North Vacancy increased to 7.6%, from 7.3% in January Often considered a solid indicator of 2019, but is down from 7.8% 12 months business confidence in Calgary, the Annual ago in January 2018. The main reason for 18.7% Calgary Stampede Rangeland Derby Tarp the unemployment rate not decreasing Auction was held on March 21st. The 2019 as employment rises, is that more people Suburban South Vacancy total was $3.285 million, up just slightly from are entering the labour force than there the 2018 total of $3.243 million. Just as with are jobs being created. Additionally, those the office vacancy levels in the city, stable jobs being created are not office-based continued on page 3

Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

QUARTERLY UNDER QUARTERLY AVERAGE VACANCY ABSORPTION CONSTRUCTION NEW SUPPLY ASKING NET (SF) (SF) (SF) RENTAL RATES (SF)

Q1 2019: 25.3% 28,000 0 460,000 $4 - $36 Downtown Q1 2018: 25.6% 169,000 460,000 0 $4 - $36 Q1 2017: 23.9% 3,000 1,860,000 0 $4 - $36 Q1 2019: 19.5% -12,000 0 0 $5 - $24 Beltline Q1 2018: 18.5% -29,000 28,000 36,000 $5 - $26 Q1 2017: 16.4% -48,000 66,000 0 $6 - $30 Q1 2019: 17.1% 76,000 0 0 $6 - $26 Suburban North Q1 2018: 17.7% -22,000 181,000 0 $6 - $30 Q1 2017: 19.0% -322,000 273,000 0 $8 - $28 Q1 2019: 18.7% 48,000 138,000 0 $6 - $29 Suburban South Q1 2018: 21.8% 93,000 31,000 0 $6 - $30 Q1 2017: 24.3% 51,000 231,000 0 $10 - $30 Q1 2019: 22.6% 140,000 138,000 460,000 Overall Q1 2018: 23.2% 212,000 700,000 36,000 Q1 2017: 22.5% -317,000 2,430,000 0 UNEMPLOYMENT RATE EMPLOYMENT (PEOPLE) LABOUR FORCE (PEOPLE 15 +) 9.4% (February 2017) 818,600 (February 2017) 903,500 (February 2017) 8.0% (February 2018) 843,000 (February 2018) 916,400 (February 2018) 7.6% (February 2019) 849,300 (February 2019) 918,900 (February 2019)

Source: Statistics Canada

WTI SPOT PRICE ($US/BARREL) WCS SPOT PRICE ($US/BARREL) DIFFERENTIAL ($US/BARREL) $11.93 $62.01 (March 17, 2017) $36.41 (March 17, 2017) (March 17, 2017)

$48.34 (March 19, 2018) $35.13 (March 19, 2018) $26.88 (March 19, 2018)

$59.09 (March 18, 2019) $49.33 (March 18, 2019) $9.76 (March 18, 2019)

Source: U.S. Energy Information Administration, Bloomberg

GDP GROWTH FORECAST CANADA-US EXCHANGE RATE FLAMES STANDINGS 2.0% (2017) (March 21, 2017) 41 28 4 (March 21, 2017) (2018) (March 22, 2018) (March 22, 2018) 4.4% 2.3% 35 30 10 (2019) (March 21, 2019) (March 21, 2019) $0.7485 $0.7747 $0.7482

46 21loss 7 win OTL Source: Conference Board of Canada, Bank of Canada, Wikipedia

Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report continued from page 1 employment and haven’t replaced Calgary Overall seen since the end of 2014. Each of the same types of jobs lost during the the Downton, Suburban South and downturn. Calgary’s unemployment ABSORPTION VACANCY RENTAL Suburban North office markets saw (DEMAND) (SUPPLY) RATES rate remains distant from the low of positive absorption in first quarter 2019 4.4% recorded in November 2014, but while the Beltline office submarket saw is below the peak unemployment rate negative absorption in first quarter of 10.3% which was recorded over two The overall vacancy rate increased to 2019. years ago in November 2016. The most 22.5% during the first quarter of 2019 significant job increases have incurred from 22.3% in fourth quarter 2018, and Average asking rents are remaining in the transportation and warehousing, is down from 23.2% recorded 12 months stable for the time being. Quoted taxes manufacturing, and administrative and ago in first quarter 2018. Across the and operating costs average $17.09 per support services industry sectors. entire Calgary office market, there is square foot (psf) for all building classes, currently 13.1 million square feet (msf) across the entire city. Class AA buildings Since the Alberta Government’s oil available as headlease space (space average $23.34 psf, class A buildings production curtailment program went available directly from the landlord), average $17.89 psf, class B buildings into effect at the start of 2019, the price which represents 75% of Calgary’s average $16.38 psf, and class C buildings for Western Canadian Select (WCS) overall availability, a shift in comparison average $14.43 psf. These numbers are has seen improvement, reducing the from 65% two years ago. further broken down within the specific differential it receives from West Texas area of city sections later in this report. Intermediate (WTI). As such, short term Absorption for the overall Calgary office It is important to note that assessments benefits have been noticed and the market continued to be positive in for office properties are seeing a government has started easing off of the first quarter of 2019, with 140,000 divergence. Average assessments have the program. As of March 18, 2019, square feet (sf) being absorbed. This is been decreasing in the Downtown WTI was US$59.09 per barrel and WCS the third consecutive quarter of positive office market over the course of the was US$49.33 per absorption for the overall Calgary office downturn, while the suburban office barrel, resulting in market, something that hasn’t been markets have seen slight increases in 22.6% a differential just OVERALL OFFICE below US$10 per VACANCY RATE 2019 Stampede Chuckwagon Canvas Auction vs barrel. The price Price of WestOil vs TexasRange lIntermediateand Derby Tarp (WTI)Auction Total differential is a direct

result of oversupply and $160 $4,500,000 the inability to access markets due to limited transportation capabilities $140 $4,000,000

(existing pipelines are full). $3,500,000

$120 l a t o T $3,000,000 n )

Right now, many companies are taking o i L

$100 t B c B u / A $ a wait-and-see approach regarding ( $2,500,000 p e r c a i r T

$80 P y office space decisions. With both a t b r o

$2,000,000 e p S D

provincial and federal election set to I d T

$60 n W a l happen in 2019, some companies are $1,500,000 e g n a looking forward to seeing what changes $40 R $1,000,000 will result to the political spectrum and resulting policy. It is anticipated that $20 $500,000 Source: U.S. Energy Information Administration, Calgary Stampede leasing activity in the first half of 2019 Compiled by: Avison Young $0 $0 7 8 9 0 1 2 3 4 5 6 7 8 6 7 8 9 0 1 2 3 4 5 7 8 7 8 9 0 1 2 3 4 5 6 7 8 9 0 0 0 1 1 1 1 1 1 1 1 1 0 0 0 1 1 1 1 1 1 1 1 1 0 0 0 1 1 1 1 1 1 1 1 1 1 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 will be slow. 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

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WTI Spot Price Rangeland Derby Canvas Auction WTI Daily Spot Price Rangeland Derby Canvas Auction

3 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

continued from page 3

average assessments. It will be worth combined with the high vacancy rate Overall Calgary Office Vacancy watching The City of Calgary work is continuing to pressure landlords Rates through their tax review as there has to make some tough decisions about been dialogue about the consequences repositioning their buildings. While the Overall Calgary Office Vacancy Rates of shifting more of the tax burden away costs associated with repositioning 30% from the downtown out to the suburbs projects are significant to landlords, they and should consideration be given to are a necessity to maintain the viability 25.3% 25% potentially shifting some of the burden of their buildings and to reposition 22.6% over to the residential side of the themselves to be active in the market. 7.36% market. 20% 19.5% 18.7% 5.59% This competitive approach by landlords 17.1% 2.71% 5.03% There was one new building completed in better quality buildings is having 1.40% 15% in first quarter 2019 (Telus Sky), located a push down effect onto landlords of in the Downtown office market. older class A buildings and the class Approximately 144,000 sf of new office B market. Tenancies in the lower-class 10% 17.95% space, in three projects, remains under spectrum are now able to compete for 16.96% 15.68% 15.99% 14.49% construction across Calgary, all in the space in the better-quality buildings

5% Suburban South office market, with 54% due to lower rent and increased pre-leasing in place. availability of options due to large floor plates being demised. Landlords and 0% Large tenants are not the dominant Downtown Beltline Suburban Suburban Overall tenants are finding a market that offers North South force in Calgary’s office leasing market Headlease Vacancy Sublease Vacancy Total Vacancy both parties a platform for completing at the moment. Overall, the average deals, as rental rates and inducements office tenant has shrunk in size, with the are now at levels where tenants lion’s share of deals being completed can either move into better quality today being less than 10,000 sf. This buildings, or look at early renewals. predominance of smaller tenants Either option can result in keeping a tenant’s cost structure stabilized Calgary Overall Quarterly Office Absorption or seeing significant cost reduction, Overall Calgary Quarterly Office Absorption 1,500,000 depending on the situation.

1,189,000 1,071,000 Downtown 1,000,000

719,000 ABSORPTION VACANCY RENTAL (DEMAND) (SUPPLY) RATES 487,000 467,000 500,000 385,000

212,000 174,000 140,000 ) 121,000 t e

e 16,000 F

e 0 r a u q S

( Calgary’s Downtown office vacancy

n -231,000 o i

t -317,000 -322,000

p increased once again. This increase r -500,000 o s b

A -609,000 was expected as TELUS Sky, the -693,000-675,000 -819,000 last remaining office tower under -1,000,000 construction began tenant fixturing in -1,085,000 first quarter 2019 and has been added -1,327,000 -1,500,000 -1,473,000 to the office market inventory. As of first quarter 2019 the Calgary Downtown

-2,000,000 office vacancy rate is 25.3%. This is up 5 4 4 4 4 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 from 24.7% in fourth quarter 2018,

1 2 3 4 1 2 4 1 2 3 4 1 2 3 4 1 2 3 4 1 3 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q but down from 25.6% 12 months ago

4 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

continued from page 4 third consecutive quarter of positive per annum. New Construction buildings in first quarter 2018. Peak vacancy for absorption for the Downtown office range between $28 and $32 psf (average this downturn, so far, occurred in the market, something the market hasn’t $30 psf). Class AA buildings range first quarter of 2017 at 26.4%. With no seen since the first three quarters between $22 and $26 psf (average $24 new construction on the horizon, it is of 2012 – seven years ago. The psf). Class A buildings range between expected that vacancies will now start a Downtown office market appears to $13 and $17 psf (average $15 psf). Class slow retreat over the next several years. be shifting towards stability. However, B buildings range between $8 and $12 psf (average $9 psf). Class C buildings Total vacancy for the Downtown office the forecasts are uncertain as to range between $4 and $7 psf (average market is 11.75 msf, broken down by: 8.3 what 2019 will bring. First quarter $6 psf). Location, building quality, size msf of headlease space (71%) and 3.4 2019 saw positive absorption for the of space, and length of term will all play msf of sublease space (29%). It needs to class AA and class B segments of into ultimately determining what the be clarified these numbers only reflect the market, while class A and class asking rate for a property is. Sublease space being marketed and does not C saw negative absorption. Over the opportunities can offer substantial include shadow space, which is vacant last three months, class AA buildings discounts from these rates and vary space that companies have not put saw positive 36,000 sf of absorption, widely. on the market for a variety of reasons. class A saw negative (-10,000 sf) of absorption, class B saw positive There is speculation this number could Similarly, quoted taxes and operating 21,000 sf of absorption, and class be anywhere from 2-5% of additional costs average $20.06 psf for all building C saw negative (-20,000 sf) of vacancy. Vacancy by class is classes, in the Downtown market. Class absorption. now: class AA –17.3%, class AA buildings average $23.34 psf, class A – 27.2%, class B – 33.8%, and 25.3% DOWNTOWN OFFICE Average asking rents for A buildings average $19.16 psf, class B class C – 25.8%. VACANCY RATE headlease space in Downtown buildings average $16.95 psf, and class C buildings average $16.01 psf. These Absorption in the Downtown are remaining steady and average rates for taxes and operating office market for first quarter 2019 range between $4 and $32 psf, costs have decreased by $0.65 psf from was positive 28,000 sf. This marks the 12 months ago. Downtown Calgary Office Downtown Calgary 5-Year & 10-Year Average Annual Absorption Vacancy Rates Downtown Calgary 5-Year and 10-Year Average Annual Absorption Downtown Calgary Office Vacancy Rates 3,000,000 35% 33.8% 2,407,000

2.67% 2,088,000 2,000,000 30%

27.2% 10-Year Annual Average Absorption 25.8% 25.3% -178,000 sf per year 25% 1.57% 1,000,000 7.77% 560,000 376,000 400,000 7.36%

20% 28,000 0 17.3% -189,000 31.11% 15%

-1,000,000 -786,000 10.82% 24.20%

-1,360,000 10% 19.39% 17.95% -2,000,000

-2,205,000 5% 5-Year Annual Average Absorption 6.45% -937,000 sf per year -3,000,000 0% -3,068,000 Class AA Class A Class B Class C Overall

Headlease Vacancy Sublease Vacancy Total Vacancy -4,000,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD

5 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

continued from page 5

Downtown Calgary Office Market There are 13 availabilities on the through 2019 as companies wait to see Average Asking Rents market in Downtown Calgary that what happens in the political spectrum have over 100,000 sf available as one with the upcoming provincial and Downtown Office Market Average Asking Rents contiguous block. These 13 blocks federal elections. Even with the addition Headlease - High-Low-Average - ($/SF/Annum) of space represent 27% of the total of TELUS Sky in first quarter 2019, $35.00 availability of space in the Downtown vacancy did not rise above the peak market and 48% of this space is vacancy of 26.4% recorded in second $30.00 $30.00 available on a headlease basis. quarter 2017 when Brookfield Place was added to the Downtown office market. $25.00 The last remaining office building $24.00 Pessimistic assumptions about the under construction in downtown forecast could push vacancy to a new $20.00 Calgary – TELUS Sky – was added to peak vacancy, however, reasonable and inventory this quarter. It contains optimistic assumptions see vacancy $15.00 $15.00 460,000 sf of new office space, which decreasing from this point forward. resulted in a 1% increase in inventory. Twelve months from now vacancy $10.00 The landlord for this property $9.00 predictions are: pessimistic assumptions completed two deals in the first $6.00 – 27%, reasonable assumptions – 25.3%, $5.00 quarter showing the market there is and optimistic assumptions – 24%. traction for this type of new space at $0.00 this time. New Class AA Class A Class B Class C Construction Looking to the future for the Downtown Calgary office market, it is Baytex energy | q1 2019 expected that absorption will be flat heavy oil pricing update CLICK HERE

Downtown Calgary Office Historical and Projected Vacancy Downtown Calgary Office Historical and Projected Vacancy 30% OPTIMISTIC ASSUMPTIONS: % % % % % % % 2 2 2 % % 1 . . . 0 0 . 9 . . % 8 8 . 7 7 7 . . 7 % 7 7 % 5 6 2 2 2 . 6 6 2 2019: Positive 150,000 sf absorption in each quarter 4 2 2 2 % % . 2 . 6 2 2 % 0 0 % 6 6 . % . 2 7 % 6 . 2 2 6 3 6 . . 2 5 2 2 . 5 % 5 2 5 2 7 2

. 2020: Positive 150,000 sf absorption in each quarter 2 % %

4 25.3% 25.3% 25.3% 25.3% 25.3%

9 9 25.1% 2 . . 24.9% 24.7%

25% 3 3 24.4% % 24.2% 2 2

9 24.0% .

% 2021 and beyond: Positive 250,000 sf absorption in 2 % 0 2 . % 7 . 5 % 3 % . 4 2 % 0

1 each quarter . 4 . 2 % 7 . 4 2 1 % 4 . 3 2 2 0 . 3 % 2 3 2 5 . % 2 2 0 . % 2 2 4 . 20% % 2 1 9 % . 2 6 0 . 2

7 REASONABLE ASSUMPTIONS: 1 % 3 . 6 1 2019: Flat absorption in each of Q2, Q3 and Q4 15% 2020: Flat absorption in each of Q1 and Q2, positive % 2 . 2

) 100,000 sf in each of Q3 and Q4 1 f % s 7

. 0 0 1 ) 0

f 2021 and beyond: Positive 100,000 sf in each quarter 0 s , %

) 0 1 f . 0 s

10% 0 9

0 4 , 0 0 , 1 0 % 3 ( 0 )

2 . , 5 f t 7 s 3 8 ) s % % %

( f 2 2 1 a

1 . . s 0 .

E 6 e 6 6 6

0 PESSIMISTIC ASSUMPTIONS: ( r 0

- t 0

r , 0 n e e 0 0 , e c 6 w 4 a 5% C 4 l

o 6 ( 2019: Negative 400,000 in Q2, negative 150,000 sf

P y T 5

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d e k l C r h S i in each of Q3 and Q4 e t

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E 2020: Negative 100,000 sf in each of Q1 and Q2, flat 0 r a a T 7 B E 0% C absorption in each of Q3 and Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015 2016 2017 2018 2019 2020 2021 2021: Positive 50,000 sf in each quarter

actual Vacancy Rate - Optimistic Assumptions Vacancy Rate - Reasonable Assumptions Vacancy Rate - Pessimistic Assumptions

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

6 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

Beltline Similarly, quoted taxes and operating Beltline Calgary Office costs average $17.95 psf for all building Vacancy Rates ABSORPTION VACANCY RENTAL classes, in the Beltline market. Class A (DEMAND) (SUPPLY) RATES buildings average $19.67 psf, class B Beltline Calgary Office Vacancy Rates buildings average $17.01 psf, and class 25% C buildings average $16.19 psf. The average rate for taxes and operating The vacancy rate in the Beltline office 19.9% 19.8% costs have decreased by $0.08 psf from 20% 19.5% market increased marginally in first 18.1% 12 months ago. 3.57% 0.28% quarter 2019 to sit at 19.5%. This is 5.03% up from 19.4% in fourth quarter 2018, There are five availabilities in Beltline 9.06% 15% and up from 18.5% 12 months ago Calgary with more than 30,000 sf in first quarter 2018. Peak vacancy available as one contiguous block. for the Beltline market, to date, These five blocks of space represent 10% during this downturn was 19.7% in 21% of the total availability of space in 17.85% 16.20% third quarter 2018. Total vacancy the Beltline office market and 32% of 14.49% for the Beltline office market is 1.6 this space is available on a headlease 10.85% 5% msf, broken down by 1.2 msf of basis. headlease space (74%) and 423,000 sf of sublease space (26%). Vacancy by Suburban North 0% Class A Class B Class C Overall class is now: class A – 19.9%, class B – ABSORPTION VACANCY RENTAL Headlease Vacancy Sublease Vacancy Total Vacancy 19.8%, and class C – 18.1%. (DEMAND) (SUPPLY) RATES

Absorption in the Beltline office market for first quarter 2019 was negative (-12,000 sf). Both the The Suburban North office vacancy rate Beltline Calgary Office Average Beltline office market’s 5-year and decreased to 17.1% in first quarter 2019 Asking Rents 10-year average annual absorption from 17.8% in fourth quarter 2018, and Beltline Office Market Average Asking Rents are 140,000 sf per year. Looking at the Headlease - High-Low-Average - ($/SF/Annum) breakdown between building classes, $30.00 first quarter 2019 saw negative Beltline Calgary Annual Office absorption for class A and C buildings Absorption $25.00 and positive absorption for class B Beltline Calgary Annual Office Absorption 50,000 $22.00 buildings. Over the last three months

$20.00 class A buildings saw negative 16,000

(-47,000 sf) of absorption, class B saw 0

positive 62,000 sf of absorption, and -12,000 $15.00 $14.00 class C saw negative (-27,000 sf) of absorption. -50,000 $10.00 $10.00 -80,000 Average asking rents for headlease -87,000 -100,000 space in the Beltline range between $5.00 $5 and $24 psf, per annum. Class A buildings range between $18 and -150,000 $0.00 $24 psf (average $22 psf). Class B Class A Class B Class C buildings range between $12 and -200,000

$16 psf (average $14 psf). Class C -214,000 buildings range between $5 and $12 -250,000 psf (average $10 psf). 2015 2016 2017 2018 2019 YTD

7 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

Calgary AverageAve Taxesrage &T aOperatingxes & Op Costserat ing Costs Class AA Class A Class B Class C All Classes psf). Class B buildings range between Downtown $23.34 $19.16 $16.95 $16.01 $20.06 $9 and $15 psf (average $13 psf). Class C Beltline - $19.67 $17.01 $16.19 $17.95 buildings range between $6 and $12 psf Suburban North - $15.66 $13.93 $11.98 $14.66 (average $9 psf). Suburban South - $15.27 $14.55 $10.63 $14.77 Overall $23.34 $17.89 $16.38 $14.43 $17.09 Similarly, quoted taxes and operating (per square foot, per annum) costs average $14.66 psf for all building ChangesCh inan Averagege in A Taxesvera g&e Operating Taxes & CostsOper ating Costs classes, in the Suburban North market. Class A buildings average $15.66 psf, (Q1 2018 vs Q1 2019) class B buildings average $13.93 psf, and Class AA Class A Class B Class C All Classes class C buildings average $11.98 psf. Downtown $0.06 -$1.40 -$0.51 $0.46 -$0.65 Beltline - $0.06 -$0.26 -$0.04 -$0.08 The average rate for taxes and operating Suburban North - $0.28 -$0.02 -$0.21 $0.14 costs have increased by $0.14 psf from 12 Suburban South - $0.26 -$0.09 $0.15 $0.20 months ago. Overall $0.06 -$0.69 -$0.34 $0.20 -$0.50 (per square foot, per annum) There are ten availabilities in Suburban North Calgary with more than 30,000 sf available in one contiguous block. These continued from page 7 Headlease vacant space decreased ten blocks of space represent 44% of the is also down from 17.7% 12 months ago by 109,000 sf, while sublease vacant total availability of space in the Suburban in first quarter 2018. Vacancy appears space increased by 33,000 sf during North office market and 95% of this to have peaked during this downturn the last three months. Total vacancy space is available on a headlease basis. for this market segment at 21.3% in the for the Suburban North office market third quarter of 2016. Looking at the is 1.7 msf, broken down by 1.6 msf of quadrants themselves, vacancy for the headlease space (92%) and 142,000 sf Suburban Northeast is 17.7%, while the of sublease space (8%). ATB FINANCIAL | MARCH 2019 vacancy for the Suburban Northwest is ALBERTA ECONOMIC OUTLOOK Absorption in the Suburban North CLICK HERE 15.1%. office market for first quarter 2019 was positive 76,000 sf. The Suburban Suburban North Calgary North office market’s 5-year average Suburban North Calgary Office Vacancy Rates annual absorption is 24,000 sf per year Suburban North Calgary Office Vacancy Rates Annual Office Absorption 25% and the 10-year average is 2,000 sf per Suburban North Calgary Annual Office Absorption 150,000 22.6% year. Over the last three months class 131,000 0.29% A buildings saw negative (-12,000 sf) 100,000 20% of absorption, class B saw positive 76,000 18.0% 93,000 sf of absorption, and class C 68,000 17.1% 1.76% 50,000 1.40% saw negative (-5,000 sf) of absorption. 15% Vacancy by class is now: class A – 0

12.3% 18.0%, class B – 12.3% and class C – -14,000

1.25% 22.28% 22.6%. -50,000 10% Average asking rents for headlease 16.22% 15.68% -100,000 space in the Suburban North range

11.06% 5% between $6 and $26 psf, per annum. -150,000 New Construction buildings range

between $22 and $26 psf, (average -200,000 -194,000

0% $24.50 psf). Class A buildings range Class A Class B Class C Overall between $15 and $24 psf (average $19 -250,000 2015 2016 2017 2018 2019 YTD Headlease Vacancy Sublease Vacancy Total Vacancy

8 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

Calgary Q1 2019 Office Construction Summary Calgary Q1 2019 Office Construction Summary Downtown New Supply Building Name Address Office Area (sf) Expected Completion % Leased / Pre-Leased LEED Target TELUS Sky 110 - 7th Avenue SW 460,000 Q1 2019 41% Platinum Suburban South Under Construction Building Name Address Office Area (sf) Expected Completion % Leased / Pre-Leased LEED Target Meadows Mile Professional Centre 1 & 2 8500 Blackfoot Trail SE 44,800 Q2 2019 75% Poplar Centre 5512 Macleod Trail SW 69,000 Q1 2020 64% Spider Block 3001 - 14th Street SW 30,800 Q4 2019 0%

Suburban North Calgary Office Headlease space decreased by 142,000 and the 10-year average is 184,000 Average Asking Rents sf over the last quarter, while sublease sf per year. First quarter 2019 saw space increased by 14,000 sf. Total positive absorption for class A and C Suburban North Office Market Average Asking Rents Headlease - High-Low-Average - ($/SF/Annum) vacancy for the Suburban South office buildings, and negative absorption $30.00 market is 2.3 msf, broken down by for class B buildings in the Suburban 1.9 msf of headlease space (85%) and South office market. Over the last

$25.00 329,000 sf of sublease space (15%). three months class A buildings saw $24.50 positive 120,000 sf of absorption, Absorption in the Suburban South class B saw negative (-73,000 sf) of $20.00 office market for first quarter 2019 $19.00 absorption, and class C saw positive was positive 48,000 sf, also the third 1,000 sf of absorption. Vacancy by consecutive quarter of positive $15.00 class is now: class A – 20.0%, class B absorption for this area of the market, $13.00 – 18.1%, and class C – 8.0%. in addition to Downtown and the $10.00 $9.00 overall office market. The Suburban Average asking rents for headlease South office market’s 5-year average space in the Suburban South range

$5.00 annual absorption is 232,000 sf per year between $6 and $29 psf, per annum.

$0.00 New Class A Class B Class C Construction Suburban North Vacancy by Location Suburban North Office Vacancy by Location 30% Suburban South

25.0% 0.0% ABSORPTION VACANCY RENTAL 25% (DEMAND) (SUPPLY) RATES 22.6% 0.3%

19.8% 20% 0.1% 18.0% 17.7% 17.1% 17.3% 1.8% 1.7% The Suburban South office vacancy 1.4% 2.3% 15.1% rate decreased to 18.7% in first quarter 15% 14.1% 0.4% 12.3% 1.6% 2019, down from 19.1% in fourth 25.0% 11.5% 1.2% 22.3% quarter 2018, and down from 21.8% 1.6% 10% 19.6% twelve months ago in first quarter 7.6% 16.2% 15.7% 16.0% 15.0% 0.4% 14.8% 2018. Vacancy appears to have peaked 12.6% 11.1% during this downturn for this market 5% 9.9% 7.2% segment at 24.3% in the first quarter

of 2017. Looking at the quadrants 0% Class A Class B Class C Overall Class A Class B Class C Overall Class A Class B Class C Overall themselves, vacancy for the Suburban Suburban North NE NW 10.1 msf 7.5 msf (74%) 2.6 msf (26%) Southeast is 19.2%, while the vacancy for the Suburban Southwest is 17.0%. Headlease Vacancy Sublease Vacancy

9 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

continued from page 9 Suburban South Calgary Suburban South Calgary New Construction buildings range Office Vacancy Rates Annual Office Absorption between $25 and $29 psf, (average $26 Suburban South Calgary Office Vacancy Rates 30% psf). Class A buildings range between Suburban South Calgary Annual Office Absorption 600,000 $15 and $23 psf, (average $19 psf).

Class B buildings range between $10 25% and $15 psf, (average $14 psf). Class C 400,000 389,000 buildings range between $6 and $12 20.0% 20% 18.7% 18.1% psf, (average $10 psf). 3.31% 1.24% 2.71% 200,000 Similarly, quoted taxes and operating 95,000 15% 48,000 average $14.77 psf for all building 0 classes, in the Suburban South market. 10% Class A buildings average $15.27 psf, 8.0% 16.69% 16.82% -141,000 0.19% 15.99% -200,000 class B buildings average $14.55 psf,

and class C buildings average $10.63 5% psf. The average rate for taxes and 7.83% -400,000 operating costs have increased by 0% $0.20 psf from 12 months ago. Class A Class B Class C Overall -538,000 -600,000 Headlease Vacancy Sublease Vacancy Total Vacancy 2015 2016 2017 2018 2019 YTD There are 17 availabilities in Suburban South Calgary with more than 30,000 sf available in one contiguous block. Three office buildings are currently These 17 blocks of space represent under construction in Suburban South 48% of the total availability of space Calgary: Meadows Mile Professional Suburban South Calgary Office in the Suburban South office market Centre, Poplar Centre, and Spider Block. Average Asking Rents and 73% of this space is available on a These buildings contain 144,000 sf, and headlease basis. are currently 54% pre-leased. Suburban South Office Market Average Asking Rents Headlease - High-Low-Average - ($/SF/Annum)

$35.00 West Texas Intermediate (WTI) vs Western Canadian Select (WCS) West Texas IntermediatDailye (WT SpotI) vs W Pricesestern Canadian Select (WCS) $30.00 Daily Spot Prices $120 Sources: U.S. Energy Information Administration, Bloomberg $26.00 Compiled by: Avison Young $25.00

$100 WTI: March 18, 2019 $20.00 $59.09 US$/bbl $19.00 $80

$15.00 $14.00 $60

$10.00 $10.00

$40

$5.00

$20 WCS: $0.00 March 18, 2019 New Class A Class B Class C $ US$49.33/bbl Construction $0 3 4 5 6 8 6 3 5 6 7 8 4 5 6 7 8 4 5 7 8 5 6 7 8 9 7 3 4 5 6 7 8 4 5 6 8 4 5 7 8 4 5 7 8 9 4 4 6 7 8 4 5 6 7 5 6 8 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 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 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 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

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l l l l l r r r r r r r r r t t t t t y y y y c c c c c v v v v v v n n n n n n n n n n g g g g p p p p b b b b b u u u u u a a a a a c c c c c p p p p a a a a e e e e e o o o o o o a a a a a e e e e e e e e e u u u u u u u u u J J J J J J J J J J J J J J J O O O O O A A A A F F F F F S S S S M M M M M D D D D D N N N N N N A A A A M M M M

WTI US$/bbl WCS US$/bbl

10 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

Suburban SouthSuburb aVacancyn South Of fibyce V Locationacancy by Location 25%

21.0% 20.4% 20.0% 20% 2.2% 19.4% BONUS STATS 18.7% 18.9% 18.1% 0.2% 3.3% 4.5% 17.0% 1.2% 2.7% 3.8% 0.2%

15% 14.4% 0.1% Calgary Office 10% 9.4% 18.8% 0.2% 18.7% 8.0% 16.7% 16.8% 16.8% Market Statistics 0.2% 16.0% 15.9% 15.6% 14.3% Calgary Q1 2019 5% 9.1% 7.8% Office Market

1.4% Statistics 0.0% 1.4% 0% Class A Class B Class C Overall Class A Class B Class C Overall Class A Class B Class C Overall CLICK HERE Suburban South SE SW 12.1 msf 8.4 msf (70%) 3.7 msf (30%)

Headlease Vacancy Sublease Vacancy Vacancy by Calgary CMA Labour Force, Employment & Unemployment Rate Location Calgary CMA Labour Force, E(Februarymployme 2019)nt, and Unemployment Rate (February 2019) Vacancy 950,000 12% breakdowns Source: Statistics Canada Compiled by: Avison Young of Calgary 900,000 10% Submarkets CLICK HERE 850,000 8% e l p o e p

f o

800,000 6%

r February Labour e b m u

N Force Survey 750,000 4% Calgary specific labour and

700,000 2% employment CLICK HERE

650,000 0% 3 4 5 6 7 8 3 4 5 6 7 8 4 3 4 5 6 7 8 3 5 6 7 8 3 4 5 6 7 8 9 5 3 4 6 7 8 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 l l l r r r r r r y y y y y y v v v v v v n n n n n n n p p p p p p u u u u u u a a a a a a a a a a a a o o o o o o a a a a a a a e e e e e e J J J J J J J J J J J J J S S S S S S M M M M M M N N N N N N M M M M M M

Labour force Employment Unemployment rate

Calgary Q1 2019 Notable Office Leasing Transactions Calgary Q1 2019 Notable Office Leasing Transactions Downtown Tenant Building Name Address Size (sf) Deal Type Brookfield Properties Brookfield Place 225 - 6th Avenue SW 30,000 Headlease - New Beltline Tenant Building Name Address Size (sf) Deal Type Sundial Growers* ATCO Centre II 919 - 11th Avenue SW 17,900 Headlease - New Suburban Tenant Building Name Address Size (sf) Deal Type Harris Corp. Harris Building 6732 - 8th Street NE 75,700 Headlease - Renewal CIMA Canada Deerfoot Atrium North 6815 - 8th Street NE 37,400 Headlease - New BGC Engineering Centre 1000 1000 Centre Street NW 19,900 Headlease - New LPI Communication Group* Manchester Business Park 5440 - 1st Street SW 12,400 Headlease - New * Indicates transactions Avison Young was involved in

11 | Partnership. Performance. avisonyoung.com Calgary First Quarter / Office Market Report

TAX TALK Calgary Office Team

Loveleen Bhatti | 403.232.4337 Paul McKay | 587.293.3365 As widely reported, there has been a significant shift [email protected] [email protected] in the value of property taxes away from the downtown core and towards the suburban market. Roseleen Bhatti | 403.232.4325 Alexi Olcheski | 403.232.4332 While this is painful for suburban landlords and [email protected] [email protected] businesses, it is a reflection of the current and historic Rachel Carter | 403.232.4304 Nairn Rodger | 403.232.4341 volatility of Calgary’s downtown office market. [email protected] [email protected] With the lagging changes to suburban office rental Sean Clark | 403.232.4384 Kirsten Scott | 587.293.3363 rates and occupancy, there is currently a similar shift [email protected] [email protected] in property taxes towards industrial and retail that has begun for select pockets of suburban office buildings, Eric Demaere | 587.293.3366 William Shenstone | 403.232.4300 particularly in the southeast. This shifting property [email protected] [email protected] tax burden trend is expected to continue over the Spencer Duff | 403.232.4387 Glenn Simpson | 403.232.4329 next 12 – 24 months and eventually encompass the [email protected] [email protected] entire suburban office inventory, continuing to push Steve Goertz | 403.232.4322 Anna Sorensen | 403.232.4383 property taxes lower. [email protected] [email protected] Optimism is currently beginning to rise slowly in Eric Horne | 403.232.4339 Todd Throndson | 403.232.4343 the downtown office market. As a result, there is an [email protected] [email protected] expectation that property tax values will see a small increase in the downtown class A office market Chris Howard | 403.265.9552 Lyndon Wilfur | 403.232.0727 within the foreseeable future. Any growth of property [email protected] [email protected] tax values over the next two years will likely remain Jason Kopchia | 587.293.3361 Alex Wong | 403.232.4327 below the property tax values of the recent past. The [email protected] [email protected] area of the market with the highest expectations for Tinyan Leung | 403.232.4334 Allan Zivot | 403.232.4307 increases in property taxes is downtown class A office [email protected] [email protected] properties; projections are over 20% over the next two years. Meanwhile, property taxes for class B and Business Condominium Team C downtown office properties are anticipated to be Pali Bedi | 403.232.4311 Fred Clemens | 403.232.4312 stable moving into 2020 and begin rising in 2021. [email protected] [email protected] The beltline office market is more difficult to predict as the volatility in assessments has not mirrored Graphics market activity. The expected trend is to see property Penelope Johnson, Senior Graphic Designer taxes decrease in the Beltline office market for the 403.232.4308 | [email protected] foreseeable future, as vacancy remains high and the neighbouring downtown office market is highly For more information, please contact: competitive with rentals rates, inducements and Research opportunities. Susan Thompson, Research Manager 403.232.4344 | [email protected]

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