The high rate of office vacancies is still a significant problem for Calgary and its long-term financial health.Todd Korol/The Globe and Mail
Kelly Doody is still coping with the financial shock that hit her small business in Calgary’s Inglewood neighbourhood two years ago, when she learned her property tax bill was about to increase by more than five times in a single year.
Ms. Doody, whose company, Social School, teaches digital marketing to entrepreneurs, was among tens of thousands of businesses in the city that faced significant increases as they became collateral damage from Calgary’s downtown vacancy crisis.
As those vacancies caused downtown property values to plummet, the city was forced to make up for that lost revenue somewhere else, and Ms. Doody says businesses like hers are still paying the price. Increasing property values in Inglewood made things even worse for her.
“The uncertainty for businesses is so immense right now,” Ms. Doody says. “This underlying monster will keep coming up unless someone does something about it that’s meaningful.”
With Calgarians voting in an election on Monday, the impact of office vacancies on the municipal budget will be among the most difficult challenges for the next mayor and council. Mayor Naheed Nenshi and the majority of councillors aren’t running again.
Calgary’s downtown office towers are currently about 30 per cent vacant, the effects of which have rippled across the city and wreaked havoc on municipal finances. Initially, the significant drop in downtown assessments meant commercial landlords elsewhere in the city, particularly in comparatively bustling neighbourhoods outside the core, such as Inglewood, were told to pay more to fill the gap.
But that set off a crisis of its own, with small businesses warning steep tax increases were threatening their livelihood after years of economic decline in the city.
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The high rate of office vacancies is still a significant problem for Calgary and its long-term financial health, as the city looks to reverse the damage by reinventing its downtown while also making its budget less reliant on the lucrative tax bills once paid by the owners of office towers.
The municipal property tax system operates in such a way that when assessed values drop only in a specific area, such as the downtown core, tax bills for those properties decrease and the shortfall is redistributed to properties elsewhere. In 2019, that meant $250-million was set to be shifted to commercial landlords outside downtown, with more than half of non-residential owners facing tax increases of more than 10 per cent.
The local government responded by cutting commercial property tax bills by at least 10 per cent and digging into its rainy-day fund to offer millions of dollars in relief. The city also reduced its budget by $60-million in 2019, which resulted in more than 100 layoffs and cuts to services such as public transit. It then decreased the proportion of tax revenue paid by businesses, effectively increasing property taxes for homeowners.
City council capped commercial property tax increases at 10 per cent in 2020 and most recently in 2021, when it approved another $13-million in relief.
Eddie Lee, the City of Calgary’s acting assessor and director of assessments, said assessed values downtown, while still declining, appear to be levelling off now, although he added that the COVID-19 pandemic has added a new layer of uncertainty.
“I think it definitely is stabilizing,” he said. “I don’t know if it’s the rock bottom. The biggest unknown factor is the pandemic and what the future of working in an office will look like.”
Assessed values are calculated by looking at a range of factors, including vacancy, lease income and recent sales of office towers. Mr. Lee brings up Stephen Avenue Place, a 40-storey tower formerly known as the Scotia Centre, as an example. It sold in 2012 for $280-million and again in 2018 for just less than $100-million. The building is half empty, according to data from Avison Young.
Avison Young, a real estate firm that tracks office leases in great detail, has said another factor is several new buildings, which were planned during the strong economy of the early 2010s, were finished and opened at the height of the oil downturn, adding more space without anyone to lease it.
While the city has blunted the worst of that assessment problem for now, spending millions of dollars every year to shield businesses outside of downtown from tax increases isn’t sustainable. The long-term fix is reducing those vacancy statistics, bringing workers – and lucrative property values – back into downtown.
City council set aside $200-million as it approved a long-term plan for the downtown core. The Greater Downtown Plan focuses on economic diversification while aiming to transform downtown into a mixed-use neighbourhood where people live, work and play.
The plan calls for more housing in the downtown core and in the neighbourhoods directly to the east and south, with a focus on units suitable for families, as well as below-market affordable housing for low-income residents. The document outlines ways to make it easier for people to get around, such as through improved public transit, better amenities to make downtown a more-attractive place to live, and bringing postsecondary institutions into the city centre.
The East Village neighbourhood east of City Hall, which added thousands of units of housing and new commercial space, has been held up as a model of what is possible. The city has a similar plan for an area called the Rivers District, southeast of downtown, where housing units for 8,000 people are planned around a new arena that was just approved and a new conference centre that is already under construction.
The Greater Downtown Plan also focuses on converting office towers into housing, a costly and complex task but one that has already been tried in several buildings that are either finished or in the process of being converted. The federal government has set aside $300-million to convert Canada’s unused office space into rental housing.
While the owners of a converted building would pay far less property tax, Mr. Lee said anything that closes the vacancy gap will increase taxes collected from office towers over the long term.
Of the two apparent front-runners in Calgary’s mayoral campaign, Jyoti Gondek, a centrist city councillor, has the most detailed proposals for downtown. Ms. Gondek, who voted for the Greater Downtown Plan, has released a platform that largely pledges to implement it.
“We are shifting toward a model of having a true mixed-use downtown instead of one that was built solely for offices,” Ms. Gondek said in an interview.
“We are now rebuilding our downtown to be a place where you can get through your daily routine instead of just a place where you pull up, sit at your desk and leave.”
Ms. Gondek also wants the provincial government to use a portion of its share of property tax revenue to help the city cover lost revenues arising from lower downtown property assessments.
She said the city has become “desensitized” to economic downturns because the oil industry has always bounced back before. Ms. Gondek said it’s clear this time that Calgary needs to reinvent itself rather than waiting for the oil sector to save the city.
Jeromy Farkas, a conservative mayoral candidate who has focused as much on opposing Mr. Nenshi as he has on competing against Ms. Gondek, wants to repeal the downtown plan. He said it needs to be overhauled to incorporate more feedback from the public, and he wants a greater focus on public safety, education and recreation.
He said previous mayors and city councils should have focused more on mixed-used development downtown to add housing, which he said would have positioned the city to better weather the current downturn.
While Mr. Farkas has not released a specific policy plank focusing on downtown – none of the points in his “10 point plan” for the city is about the core – he said policies such as freezing property taxes bring in more businesses to fill empty office towers.
“It’s an existential problem for the city,” he said in an interview.
“This campaign is about the future of Calgary, it’s about economic opportunity and the downtown vacancy issue is emblematic of that. The lack of opportunities that Calgarians are experiencing is playing out in a different way, but it’s most visible through those empty office towers.”
Whoever wins the municipal election faces a complex problem that will take years to solve. And there won’t be any single thing that fixes it.
Susan Thompson of Avison Young said the city’s vacancy rate has now surpassed the worst of the recession in the early 1980s.
She said the city needs to be pursuing a range of policies, including fostering industries such as green energy and tech, and converting unused space.
“We’ve got 14 million square feet sitting empty – that’s a lot of tenants, that’s a lot of people, that’s a lot of repurposing buildings,” she said.
“That’s a lot of things to even make a dent in that. We certainly want to see every possibility considered to help the situation that Calgary is in.”
Avison Young projects the rate of Calgary’s downtown office vacancies will remain in the high 20s for at least the next couple of years, although recently the rate has tracked the company’s optimistic projections as higher oil prices begin to breathe life into the economy.
Ms. Thompson said it’s not yet clear how the pandemic will affect those projections as companies assess how much office space they need if more of their staff are working from home.
Whatever happens, she said Calgary’s economic fortunes – and the future of its downtown – will be tied to the energy industry for the foreseeable future, even if that looks different with more focus on renewables, for example. She said that even now, energy companies still occupy the largest share of leased office space compared with other sectors.
“The pie is obviously changing,” she said. “We’re going to be seeing more renewables and green energy options coming in as part of a mix, but energy is going to continue to be part of Calgary.”
This is part of a series on the future of Calgary’s downtown, hit by years of economic decline that has left its office towers nearly a third vacant, and the solutions that could drive a recovery.
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Editor’s note: A previous version of this story incorrectly said Calgary imposed a 10 per cent cap on commercial property taxes in 2019. In fact, the city cut property tax bills by at least 10 per cent that year and then capped increases in subsequent years.