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Going the Distance

Downtown office sector sparked by renewed sales activity

Artist rendering of new retail podium at Stephen Avenue Place (CNW Group/Slate Asset Management LP)

Calgary’s embattled downtown office sector may have beat the 10 count following several recent transactions that experts say could be a sign of things to come.

Yet, they also warn it will still be a long battle back after years of economic downturn have emptied towers and increased vacancy rates to near historic highs that at one point peaked around 30 per cent.

Altus Group, a leading Canadian commercial real estate services and software company, recently reported that 589 transactions took place in Calgary in 2018 worth $3.7 billion, which was up 16 per cent from $3.17 billion the previous year. The office sector was the most active, up 21 per cent year over year with 43 deals worth $960 million that were focused primarily downtown.

“The activity you’re seeing downtown is a sign of confidence, especially if you look at one of the big buyers in 2017 and 2018, which is Slate (Asset Management LP),” says Ray Wong, vice-president, data operations, data solutions at Altus Group. “They look at assets that will grow in returns and value over time.”

Late last year, Slate finalized a series of purchases along Stephen Avenue: the Kraft and Venator buildings at 222 and 232 Eighth Avenue SW, respectively. The Toronto-based private real estate firm also acquired the 235,000-square-foot Life Plaza at 734 Seventh Avenue SW in the downtown west end, as well as the 107,000-square-foot Joffre Place at 708 11th Avenue SW in the beltline district.

The four transactions come several months after Slate finalized the purchase of the former Scotia Centre office tower at 700 Second Street SW, recently renaming the 620,000-square-foot space Stephen Avenue Place.

Overall, Slate has made a considerable splash in Calgary over the past two years, acquiring 25 properties, including 12 in the downtown area, totalling 2.5 million square feet of commercial space. Slate is estimated to now own more than five per cent of Calgary’s downtown office space.
“Slate is no stranger to Calgary,” says Aly Lalani, a Calgary-based executive vice-president with Colliers International who is managing office leasing for Stephen Avenue Place. “They invested here back in 2005 and held assets until 2011. They’ve always liked Calgary. They know Calgary has some volatility, but are long-term believers in the city.

“It’s a positive message that a Canadian company is investing in arguably one of the hardest hit markets in Canada.”

Slate is not alone, either. Earlier in 2018, Spear Street Capital completed a $98-million deal with Dream Office REIT for IBM Corporate Park at 227 11th Avenue SW in the beltline. The six-storey office building includes 107,000 square feet of class A space.

“These are good signs that outside investors are taking a long look at Calgary,” says Greg Kwong, executive vice-president and regional managing director, Alberta for CBRE.

Kwong also points to private and local investors who are realizing opportunities that didn’t exist previously. He notes last year was characterized by more private investors looking at getting back into, or increasing their portfolio, in Calgary.

“If you believe in the old adage of buy low, sell high, people were trying to buy low,” he says.
Wong agrees, noting a lot of private and local investors were priced out of the market during the oil boom as institutional players picked up much of the available property.

“What we’ve seen in the past year is those institutional players have refocused on core assets and core values, which in turn has led to them trimming their portfolio,” he says. “And that’s creating opportunities for private and local investors to get back into the market, which is a positive.

“There’s an anticipation, especially on the office side with the market and employment numbers starting to improve, that there could be higher returns – even in the short term as the vacancy rate comes down.”

Another positive sign for the downtown office market is an uptick in the number of businesses moving back into the core. CBRE’s Calgary Downtown Office Q4 2018 report signalled out recent moves such as Golder’s decision to leave the suburbs and take up 70,000 square feet of space downtown.

Sublease space in the core has also decreased for six consecutive quarters – down to 28 per cent at the end of last year. As that space continues to decrease from the five-year average of 40 per cent, landlords will have additional space to lease in a stagnant market, notes CBRE.

While price and optimism are fuelling much of that investment, so too is the creativity of landlords, says Wong. To encourage companies to set up shop downtown, many building owners are getting creative with their spaces. Slate, for example, is giving Stephen Avenue Place a significant renovation that includes a complete restoration of the ground-floor, second-floor and third-floor retail and restaurant spaces.

“Tenants are using real estate to attract skilled labour,” says Wong. “They are looking for flexible workspaces, games rooms, bike lockers, coffee shops and other types of amenities to attract talent.
“So, landlords are focusing on how to make their spaces more attractive. It’s key that they invest in their properties, offer different types of amenities and attract the best tenants in the market.”
Yet, until the “sell-high” time arrives, landlords will still need to weather the storm, notes Kwong. While CBRE reported 48,709 square feet of positive net absorption in 2018 – the first time since 2014 that the downtown office market experienced year-over-year gains – vacancy rates still remain at 26.4 per cent.

Colliers International reported similar numbers in its fourth quarter report, with positive net absorption levels in the downtown office sector to close out the year yet vacancy levels remaining “stubbornly high,” fluctuating around 26.5 per cent.

That said, Lalani feels renewed interest from investors outside of the city, combined with some businesses re-entering the core, is a sign “the worst is behind us.”

“We expect to see positive absorption yet again this year, with the wild card being any mergers and acquisitions that create duplication of staffing could lead to excess office space in the market,” he says, adding the best deals for office space in the city are still downtown.

Lalani also doesn’t expect to see any new developments coming on stream in the foreseeable future after Telus Sky was added to Calgary’s office vacancy inventory this past quarter.

While CBRE acknowledges the pace of companies downsizing is showing signs of slowing, it expects that, with depressed pricing for Canadian oil and gas, 2019 will be another year of layoffs, bankruptcies, mergers and resulting excess space.

Calgary has an estimated 45 million square feet of total office space. With typical vacancy rates around eight per cent, that means another nine million square feet would need to be leased before the city returns to optimum conditions – which could take upwards of 10 years, says Kwong.
“Long term, Calgary always bounces back,” he adds. “A bad sign would be if investors weren’t looking at us. That’s not the case here. Good value always comes back.”