Research & Forecast Report Accelerating success. CALGARY DOWNTOWN OFFICE MARKET Fourth Quarter 2018 Economic Outlook The fourth quarter of 2018 capped off another challenging decrease but remain on par with the national average. There year for Calgary’s downtown office market and Alberta’s is some light at the end of the tunnel as, in addition to the Line energy industry. The WTI benchmark averaged roughly $66 3 Project, there is a possibility that we will see construction per barrel in 2018, the highest annual average price per barrel start on either Keystone XL or the Trans-Mountain Expansion since 2014. Unfortunately, the Canadian benchmark WCS did Project. If improved market access is realized, we can expect not keep pace and the province of Alberta has yet to fully to see Alberta once again benefit from higher oil prices. recover from economic stagnation. As it relates to the commercial office space market, vacancy Alberta’s primary struggle stems from an unprecedented levels remained stubbornly high at the end of 2018, fluctuating differential between realized prices and WTI spot price, around 26.5%. Telus Sky was added to Calgary’s office attributable to a lack of market access which was exacerbated vacancy inventory this past quarter and is most likely the last by scheduled refinery maintenance in the U.S. Midwest. new development for the foreseeable future. Pipelines have either not yet been constructed due to regulatory challenges or have been outright cancelled. This AA class office space continued to outperform all other has left Alberta’s heavy oil producers with the significant building classes, with only 8.04% of total AA inventory dilemma of how best to contend with an oil glut and limited consisting of available headlease space. The B class office pipeline capacity. market again continued to show the highest vacancy levels, with over 3.3 million square feet of headlease space available, In response, the Government of Alberta is enacting legislation representing over 40% of total B class inventory. By the end to cut production in order to strengthen the implied price of of 2018, the AA class market saw positive absorption of WCS by reducing the price differential. However, these issues approximately 890,500 square feet, A class space was could persist well into 2019, or at the very least until the positive 249,000 while the B class market saw negative Enbridge Line 3 replacement project comes online, which will absorption of roughly 609,000 square feet. add some much-needed pipeline capacity. In significant market news, Nexen vacated nearly 600,000 As 2018 ends and we look ahead to the new year, expectations square feet in the Nexen Building, completing a full office are that economic growth for the province of Alberta will move into approximately 300,000 square feet of Cenovus Breakdown of Downtown Calgary Office Vacancy By Class Headlease & Sublease Comparison BUILDING CLASS TOTAL INVENTORY HEADLEASE AVAILABILITY SUBLEASE AVAILABILITY TOTAL AVAILABILITY Q3 2018 Q4 2018 Q3 2018 Q4 2018 Q3 2018 Q4 2018 Q3 2018 % Q4 2018 % AA 16,856,813 16,856,813 1,342,962 1,355,432 2,098,409 2,017,381 3,155,199 18.7 3,372,813 20.0 A 13,738,290 13,738,290 2,042,745 2,079,598 898,333 878,678 3,012,182 21.93 2,958,276 21.53 B 8,290,285 8,290,285 3,299,254 3,353,815 117,279 143,482 3,503,798 41.9 3,497,297 42.1 C 5,329,279 5,329,279 1,706,086 1,668,596 177,842 198,984 1,867,654 35.0 1,867,580 35.0 Total 44,214,667 44,214,667 8,391,047 8,457,441 3,291,863 3,238,525 11,538,833 26.1 11,695,966 26.5 2018 Total Absorption: 661,714 Source: Colliers Research Q4 2018 1 Research & Forecast Report | Fourth Quarter 2018 | Calgary Downtown | Colliers International Summary Statistics Year End Year End Downtown Office Market 2017 2018 Trend sublease space in The Bow. The vast majority of personnel OFFICE INVENTORY 43,819,194 44,214,667 moved just before the holiday season began, and the net effect of this is yet to be fully accounted for, as the status of NET ABSORPTION -156,986 661,714 Nexen Building and whether it becomes available for new tenants is currently unknown. VACANCY RATE 27.47% 26.45% AVERAGE ASKING NET RENT $14.00 $14.00 Throughout the last quarter of 2018 and into the new year, (‘A’ CLASS BUILDINGS) there continues to be tenant demand in the 2,000 – 5,000 AVERAGE ADDITIONAL RENT (‘A’ CLASS BUILDINGS) $20.50 $20.00 square foot range, and landlords have responded by building out show suites to meet that demand. Absorption Summary Year End Year End Downtown Office Market 2017 2018 Trend With approximately 12,000,000 square feet of available space AA 492,458 890,561 in the Core, based on average absorption rates, it will be well into the 2020’s before we see any semblance of a balanced A -492,063 248,849 market. However, as Calgary is a resilient and entrepreneurial city, if fundamental energy related issues are solved in the B -55,111 -608,936 near term, we could see an economic rebound as dramatic as C -102,270 131,240 the recent downturn. TOTAL -156,986 661,714 Aspen Properties purchased Sunlife Plaza for $225,000,000 ($213 per square foot) and is planning major renovations. Total Inventory & Occupied Space Calgary Downtown Oce 50 45 Q3 2014 OCCUPIED SPACE 37,333,600 SF Q3 2009 OCCUPIED SPACE 40 31,123,546 SF Q4 2018 OCCUPIED SPACE Q1 2007 32,518,701 SF OCCUPIED SPACE 33,214,742 SF (MILLIONS) SQUARE FEET SQUARE 35 30 Forecast per Year *Absorption: 500,000 SF 25 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CMN Calgary Inc. OCCUPIED SPACE TOTAL INVENTORY 2 Research & Forecast Report | Fourth Quarter 2018 | Calgary Downtown | Colliers International Impact of New Property Tax Assessment In 2019, the downtown assessment base has decreased from $16B to $12B, causing suburban properties’ tax burden to increase significantly. Although the core has decreased, certain building classes have seen greater decreases than others. Property Taxes Class Assessment Tax Explanation Largely due to a reduction in the average rental rate from $31.00 to $24.00 AA 20% 5% PSF. Due to a $7.50 PSF decrease in the average A Class rental rate, a 75-basis A 55% 40% point increase to the capitalization rate, and a 10% increase in vacancy rate. Largely due to a reduction in the average rental rate from $19.00 to $13.50 B 30% 15% PSF. Largely due to a reduction in the average rental rate from $13.00 to $10.50 C 40% 25% PSF. Composition of Headlease Vacancy January 1st 2013 - December 31st 2018 AS AT DECEMBER 31ST 2018 AA 1,355,432 SF 8.04% TH A 40 AS AT APRIL 30 2015 2,079,598 SF 15.14% B AS AT JANUARY 1ST 2013 AA 237,118 SF 1.66% 3,353,815 SF 40.45% C AA 53,948 SF 0.40% A 858,280 SF 6.46% 1,668,596 SF 31.31% 35 A 250,693 SF 1.89% B 838,990 SF 9.70% B 341,519 SF 3.91% C 559,604 SF 13.24% C 395,149 SF 8.33% 30 25 20 15 Headlease Vacancy Rate Headlease Vacancy 10 5 0 2013 2014 2015 2016 2017 2018 2019 BUILDING CLASS AA A B C 3 Research & Forecast Report | Fourth Quarter 2018 | Calgary Downtown | Colliers International Notable Transactions Approx. Square Company Building Address Footage 1. Nexen The Bow 500 Centre Street SE 300,000 CES Energy 2.* Centrium Place 332 6 Avenue SW 63,000 Solutions Corp. 3.* Wolf Midstream Inc. Centennial Place East 520 3 Avenue SW 44,000 4. The Mancal Group Watermark Tower 530 8 Avenue SW 40,000 5. MLT Aikins LLP Livingston Place - South Tower 222 3 Avenue SW 33,075 Packers Plus Energy Services 6.* Eighth Avenue Place - East Tower 525 8 Avenue SW 24,000 Inc. 7.* RS Energy Group Eighth Avenue Place - West Tower 585 8 Avenue SW 18,000 8.* GMP Securities Ltd. Bow Valley Square IV 250 6 Avenue SW 15,000 *Transactions that Colliers was involved in. Historical & Projected Vacancy 2010-2019 New Oce Development, Annual Absorption & Vacancy Rates DOWNTOWN OFFICE MARKET 3000000 30% 26.59% Q3 2018 26.45% 2500000 Q4 2018 25.47% 24.80% 2000000 Q4 2016 25% 1500000 1000000 20% 18.11% RATE VACANCY 500000 Q4 2015 15.22% 0 15% -500000 12.70% 11.97% SQUARE FEET SQUARE -1000000 10% Q4 2019 Absorption 278,385 SF 8.52% -1500000 Q4 2014 7.27% Q4 2013 -2000000 5% 4.49% Q4 2011 3.68% FORECAST -2500000 Q4 2012 -3000000 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 NEW OFFICE HISTORICAL & VACANCY RATE DEVELOPMENT PROJECTED ABSORPTION 4 Research & Forecast Report | Fourth Quarter 2018 | Calgary Downtown | Colliers International 9 STREET NW Development Cycle GLENWOODMANOR Centennial Place East & West BOW RIVER DISCOVERY Development(s) HILL 310-314 CALGARY DOWNTOWN MAP 321 NW ST 10 Eighth Avenue Place - East Tower 10 ST NW 1 AVENUE NE BROKEN PLATE RIVER RUN CONDO’S HILL LEGEND HOUSE 2,260,688 SF 301 HOLLY Square Footage 10 ST NW PARK 233 YARD 2010 MEMORIAL DRIVE NW PRINCE'S ISLAND ESTATES UNDER CONSTRUCTION COMMERICAL YEOMAN'S MARSH ROAD NE 500 HOLLY Annual Absorption 1,871,708 SF EAU CLAIRE POINT PEACE BRIDGE FUTURE/POTENTIAL COMMERICAL SITE THE PRINCETON 10 STREET NW STREET 10 WATERFRONT MANOR EAU CLAIRE CONDOS COMMERCIAL HOWIE HELIPORT YMCA MEREDITH BLDG CENTRE STREET BRIDGE STREET CENTRE ST VLADIMIR'S 211 EAU CLAIRE MARKET UNDER CONSTRUCTION RESIDENTIAL UKRAINIAN 10 ST NW MEMORIAL DRIVE NE ORTHODOX 130- 148 10 ST NW ST 10 148 130- CHURCH BARCLAY PARADE BARCLAY CAFE Development(s) No New Developments THE EAU CLAIRE AVENUE SW 1886 BOW RIVER P CONCORD RIVERFRONT AVE SW FUTURE/POTENTIAL RESIDENTIAL SITE MEREDITH ROAD NE MILL BARLEY 1 AVENUE SW RESIDENTIAL MILLENIUM SIEN LOK PARK 205 Square Footage N/A CALGARY SHERATON JOEY TOWER CHINATOWN EAU CLAIRE CENTRE SENIOR’S 2011 TOMATOES EAU CLAIRE P P P RIVERFRONT KENSINGTON NW ST 10 126 - 106 APTS BOW GATE LA CAILLE CLAIRE COVERED SURFACE PARKING BOWSIDE RESTAURANT ESTATES JOE P BLDG MANOR PHILLIPS LA CAILLE 116 140 P N.W.