Over the next ten years, Calgary has plans to repurpose 6,000,000 square feet of office space into purposefully built rentals, including this building being developed by People First Developments, on the corner of 5th Ave SW and 8th St SW.Glenn Lowson/The Globe and Mail
When the story is really bad, any reversal in trend is a win, however small. And that’s what’s happening in Calgary’s downtown office space these days.
Greg Kwong once worried about the vacancy rate hitting 40 per cent. Now, the CBRE Group Inc. managing director – who knows the downtown market in Alberta’s biggest city inside and out – is less concerned; he says it’s like a major bleed has just been stopped.
“We’ve covered up the arteries and there’s a bandage on it. But now we’ve got to heal,” he said.
But it’s still not a pretty picture. According to the CBRE’s latest report, released this week, Calgary’s downtown office vacancy rate sat at 31.5 per cent (suburban is 25.4 per cent) in the second quarter of this year. That’s the highest among Canada’s major cities, including Edmonton, where the rate is 24.1 per cent.
Calgary also stands out because its downtown office vacancy rate dropped for the fourth consecutive quarter, even as most other Canadian cities saw their numbers inch higher. So many city centres emptied out in this pandemic era, and remote work and weak tenant demand has challenged office towers – and ancillary businesses – to remain relevant.
The high vacancy pain that Calgary has been through the last eight years – as an industry town hit hard by the oil price collapse – has, in an odd way, prepared it for the reality of the current global office slump. Way before COVID-19, Alberta’s largest city was compelled to get serious about economic diversification, conversions to create new residential spaces and other creative reimaginings of buildings.
“We had to figure this out starting in 2015. And everybody else is just figuring this out now,” said Deborah Yedlin, chief executive of the Calgary Chamber of Commerce.
Traditionally, a healthy office vacancy rate is 7 per cent to 8 per cent, according to Mr. Kwong. But the CBRE reported this week that downtown office vacancies are creeping up in Canada, hitting 18.1 per cent in the second quarter of this year – the highest it’s been since 1994. Not only is that vacancy rate the highest it’s been in nearly 30 years, but there’s 16.8 million square feet of vacant space available for sublease nationwide, a record high.
A similar situation is playing out in the U.S. Last month, the San Francisco Chronicle reported that the office vacancy rate rose to a new record high of 31.8 per cent in the second quarter – a percentage strikingly similar to Calgary – marking three straight years of that market’s downturn. In Chicago and Houston, vacancy rates are going higher. The amount of office space for rent in New York also hit a record high this year.
More people are working from home, at least part of the time. They don’t want to go back to the 5-days-a-week slog of dressing and commuting to work. It also reflects the current economic uncertainty. Even if you’re not in an industry such as tech, which has already been hit by layoffs, no one in management is going whole hog into leasing massive amounts of office space in mid-2023.
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The City of Calgary has been watching its downtown decline, along with property values. The real push to try to reverse this has taken place over the last two years. The city has given $75 per square foot, to a maximum of $10-million per property, for projects to convert offices to residential spaces. And it’s apparently showing results: Natalie Marchut, who manages the downtown strategy, said early this year that Calgary is a third of the way in meeting the goal of removing six million square feet of empty office space.
Housing is in high demand across North America, but office-to-residential conversions face an array of expensive challenges. Still, the Calgary program has been held up as an example from London, Ont. to Washington. The CBRE report also notes that the Calgary market has seen gains in engineering, construction and education sectors.
In March, city council expanded its Downtown Calgary Development Incentive Program beyond office to residential conversions. Grants can now be provided to building owners who would like to convert empty office space to hotels, schools and performing arts spaces. It also gave approval to cover 50 per cent of demolition costs, according to a formula based on square footage, for building owners who wish to partake – to a maximum of $3-million per property.
“We’ve moved the fastest from talk to action,” said Ms. Yedlin, adding there are no quick fixes. The demolition of some old buildings to create space for purpose-built multifamily housing –including low-rise buildings – needs to be a part of the mix. She also wants to see a push on getting a stronger postsecondary presence downtown.
What gives Mr. Kwong extra optimism is that Calgary no longer has the highest sublet vacancy rate, which is always an indicator companies are downsizing. Calgary workers have also come back to downtown in greater numbers than workers in some other cities, he said. Mr. Kwong attributes this to a slightly younger work force, and the nature of the energy industry – still 75 per cent of downtown occupancy – which has pushed people back to the office. He also chalks it up to Calgary’s less-painful commutes and inclination toward business-casual dress, which makes a return less onerous for workers.
No one is throwing a victory parade yet. Calgary will still be trying to clear vacant downtown office floors five or 10 years from now, or longer, Mr. Kwong said. And no one should forget that part of the current movement on office vacancy rates is a testament to how the economy of Calgary runs countercyclically to city economies in other parts of Canada.
“It’s just because we’ve been so bad for so long and everybody else has been so good,” Mr. Kwong said.