Home July 2018 Road to Recovery

Road to Recovery

Calgary’s commercial leasing market clawing back after years of suffering

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The Alex family health centre.

Positive momentum in Calgary’s commercial leasing sector has industry experts expressing muted optimism following years of downturn conditions.

Yet some also warn it will take time before the sector returns to “normal” conditions, and the road to recovery will be fraught with challenges that will force landlords to adapt.

“We still haven’t seen significant increases in rates, but leasing activity is up and we’ve seen positive absorption for the first time in years,” says Alexi Olcheski, executive vice-president – principal with Avison Young, which reported 212,000 square feet of office space in Calgary being absorbed in the first quarter of 2018.

Calgary’s overall vacancy still sits at 23.2 per cent, up from 22.5 per cent 12 months ago. Vacancy was the highest downtown at 25.6 per cent.

Similarly, CBRE reported a downtown vacancy rate in the first quarter of 27.5 per cent. Yet it saw a silver lining as well, with 68,390 square feet of positive absorption in the core, marking only the second positive quarter since late 2014.

“We’re still hovering at high vacancy rates, but based on a year ago, there is a greater sense of optimism,” says Greg Kwong, executive vice-president and regional managing director (Alberta) for CBRE.

“Tenants are moving or growing, whereas a year ago it was completely stagnant. In the downtown office market, specifically, we’re seeing an increase in leasing activity even though there’s not a lot of new net growth.

“We’re still not out of the woods, but it looks, feels and smells like we’re at the bottom right now.”

Forging a path out of the woods will take time and “pulling all the levers,” he adds. Calgary has approximately 45 million square feet of total office space, and is used to seeing vacancy around eight per cent. At 28 per cent currently, that means another nine million square feet would need to be leased before the city returns to optimum conditions.

Kwong estimates Calgary currently has a five to 10 year supply of downtown office space.

Calgary’s suburban sector, meanwhile, has held its value over the past two years. Avison Young pegged vacancy in the first quarter at 22.3 per cent, yet Olcheski adds it has traditionally hovered around 15 per cent.

“There are suburban buildings that are still garnering strong rental rates – especially in niche areas with limited supply for class-A product such as Marda Loop and Kensington,” he says.

Niche tenants are also emerging in these supply-rich times – notably with tech in the core and new entrepreneurs in the suburbs.

“We’ve been seeing an increase in diversity in our overall tenant base,” says Olcheski.

He credits the increase in non-traditional leasing activity to landlords willing to get aggressive with rates and creative with their spaces.

“Within the past 12 months, we’ve seen a lot more collaborative workspaces being developed – non-traditional office environments,” he says, pointing specifically to Aspen Properties’ work with tech incubators downtown, the Strategic Group’s development of collaborative workspaces and Artis REIT’s focus on tech-friendly buildings.

Allied Properties REIT, which owns nearly one million feet in downtown and the beltline, is another one of those creative landlords. The company has focused on developing properties that tend to be more affordable, centrally located and situated in re-adapted spaces within historic buildings.

President and CEO Michael Emory says Allied’s properties have held up well over the past couple years – especially for Calgary’s growing number of tech, advertising, media and IT tenants.

“There’s no question that the format we focus on tends to hold up a little better in a downturn – in larger part because we’re a low-cost provider in the inner-city,” says Emory, noting about 90 per cent of its portfolio in the city is currently leased. “People can’t really move out of our buildings and save money.”

He adds Allied, like most landlords, has been flexible with its terms and rates, but has focused more so on building turnkey spaces specific to tenants’ needs.

“I think the future of Calgary is bright. I really do. I’m glad we’re there. We would increase our exposure to Calgary if good opportunities came up,” says Emory.

Kwong, however, believes the solution to Calgary commercial leasing woes will not come down to just creative landlords or lower vacancy rates. Instead, it will largely come from reducing high-unemployment levels in the city – which, at eight per cent in April, outpaced the national average of 5.5 per cent.

“The rule of thumb is you need about 250 square feet of space for every person in the core. So if you take the 40,000 people who have been laid off in the last three years and hire them back, at 250 square feet per person, guess what? We don’t have a vacancy problem anymore,” says Kwong.

“The bigger question is when will oil and gas companies begin to start hiring again?”

 

New Lease on Life

Non-profits benefit from Calgary’s soft commercial market

Timing, as they say, is everything. That’s proved especially true for local non-profit organizations, which have emerged as winners within a commercial leasing market that’s struggled with high vacancy rates in recent years.

In early 2015, the Alex was approaching a crossroads. The non-profit, which has provided accessible health-care and social programs to Calgarians for more than 40 years, had its five locations across the city coming up on expiring leases by year’s end.

CEO Shelley Heartwell knew she wanted to consolidate some of the Alex’s locations, but never expected to find or afford a single building to house all of the organization’s administrative and client service functions.

Six months into the downturn, however, Heartwell found not one, but several potential locations before settling on the former Honeywell Building on 2nd Avenue SE near 28th Street operated by Artis REIT. Located steps from the Franklin C-Train station, the 60,000-square-foot building allowed Heartwell to not only collect all administrative staff under one roof, but also centralize all of the Alex’s client services in a dedicated 40,000-square-foot space.

“I always thought I would need to get at least two separate locations. I didn’t think I’d be able to find a facility large enough to house us all together,” says Heartwell, who moved into the new location in June 2017. “I never thought this would happen in my lifetime.”

Freshly minted as the Alex Building, Heartwell says the benefits to having a central location extend far beyond convenience – although accessibility to staff and clients has been huge. The larger space has also allowed the organization to expand its services, including adding a larger youth centre, 16 examining rooms in the family clinic, a pharmacy and a teaching kitchen and workshop. Artis REIT even agreed to renovate the building to accommodate more customized programming.

“It came at a time when everyone was very uncertain about the economy,” says Heartwell, noting they’ve signed a 15-year lease on the property with the option to purchase. “And it’s such a large space. Not everyone needs this much space in the inner core.”

The Calgary Women’s Emergency Shelter has similarly benefited from a soft commercial office market. Nearly two years ago, the non-profit organization relocated its administrative staff and many of its client services to the Centre 15 tower just off 17th Avenue SW.

The 13,000-square-foot space – which would “have never been available five years ago” – not only doubled CWES’ previous footprint, but also better connected the organization with the community, says executive director Kim Ruse.

“It’s been a game-changer for us. We were just sort of invisible before. Now, we’re more accessible,” she says. “It has also allowed us to mobile the team more locally. We were able to co-locate our administrative staff with our service teams, which freed up space in the shelter. It has really changed the energy of the organization.”

In addition to redesigning the space to fit CWES’ needs, Ruse says the building’s owners, Artis REIT, were also flexible with rates over the term of the 11-year lease.

“They were quite excited to have a non-profit come back into that building. We’re good tenants in that our funding is fairly constant. We don’t have large ups and downs. And other non-profits have since followed us.”

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