Having endured two years of the recession, Calgary’s residential and commercial real estate markets are worse for wear. Prices and sales are down; vacancies are up; lease rates have plummeted. While what’s happened in the markets is not surprising, it nevertheless hurts for many. For others, opportunities unimagined just a few years ago have provided a consoling silver lining.
So what’s in store for 2017? With few expectations of a major upsurge in oil prices, most experts are calling for more of the same – in some cases somewhat better, in others somewhat worse – for next year.
On the residential side, cautious optimism is in the air. “We see a slight pick up from 2016 based on an improvement in overall economic activity,” says Sue Anne Valentine, a partner at Rooney Cronin Valentine. “The increase is projected to be about five per cent in sales volume.” She expects a similar increase in listings and the average/median sales price.
Others are less optimistic. “In 2017, if all the current economic conditions continue to prevail, the Calgary real estate market should begin to feel an increase in negative momentum in demand but more measurably in the average sale price,” explains Don Campbell, a founding partner and senior analyst at the Real Estate Investment Network.
While the market hasn’t dropped as much as some had expected – thanks to previously high rents and seller resilience – recent policy changes will put a damper on confidence. “Calgary’s real estate market is especially vulnerable given the addition of the coming provincial carbon tax, no end in sight for low oil prices combined with the recently implemented changes by the federal government’s mortgage qualification rules,” Campbell says.
Minimal improvement in the rental market is expected; rising unemployment and continued outmigration will cause vacancy rates to continue to climb. “However, the new mortgage rules will keep that upward push on vacancy rates slower than would economically or cyclically be expected,” Campbell qualifies.
Location will matter for both sales and rentals. “Inner-core sales have definitely been stronger this year than suburban transactions and we expect this trend to continue into 2017,” says Valentine. Campbell stresses the importance of proximity to public transit. “Values and rents within 800 metres of C-Train stations will be overall more stable than those away from these well-serviced areas.”
Apartment sales, which have suffered the most in the downturn, will continue to decline as a surplus of new product comes onto the market. “This will provide buyers who wish to live in the condo lifestyle an opportunity,” Campbell says.
Other opportunities will prevail as well. “[It’s] definitely a buying opportunity for those wishing to upgrade into the luxury market,” Valentine advises.
On the commercial side, experts predict the downtown office vacancy rate – currently at a record high of approximately 23 to 25 per cent – will continue to rise. “2017 will almost assuredly have negative net absorption,” says Kevin Gordon, partner at Cypress Real Estate Ltd. “Over the total scale there’s going to be more space put onto the market than coming off.”
Gordon highlights two buildings – Manulife Real Estate’s new building of 564,350 square feet and the 1.4-million-square-foot Brookfield Place – will add a ton of space to the market. “By early 2018, when all these buildings are completed, we’re going to see the vacancy rate in the high 20s, possibly pushing 30 per cent.”
Greg Kwong, regional managing director of brokerage services for CBRE, expects the amount of sublease space coming onto the market to slow. “We think we’re at bottom now, and there’s a little bit of growth for next year, but the overall vacancy will still go up.”
Rents will remain at an all-time low. “If you’re a company that has a lease expiring in the next two years, rejoice,” says Kwong. “Because whatever your expense line item is for rent, it’s going to come down dramatically.” As a result, many tenants are upgrading their space.
Tenancy deals are all over the map and include things like net-effective rates, lease incentives, free rent and cash allowances. “We’re seeing deals done for AA space between $0 and $20/square foot,” says Gordon. “But no tenant will actually pay $20/square foot – they’re getting free rent or cash allowances to build the space out.”
Despite the bad news, investment in the core continues. “We’ve noticed a spike in pension fund investments in Calgary in a number of major office buildings,” Kwong says. “I think we’ll see a few more of those deals happening in 2017.” Not surprising given the dramatic drop in prices. “Historically, the city was assessing AA buildings at about $700/square foot,” says Lee Thiessen, partner and national leader, real estate and construction, with MNP LLP. “Today, you’re seeing similar AA transactions in the $400/square-foot mark.”
Commercial real estate outside the core has likewise suffered, though to a lesser extent. “The industrial vacancy rate is closer to seven-and-a-half per cent,” Kwong says. “Traditionally, industrial in Calgary has been around three per cent. But if you look at the global market, seven per cent is quite a healthy market.” Vacancies in the retail market have come up slightly too.
Thiessen concurs the suburban commercial market is the least exposed to the recession. “You see some pretty good diversification there from high-tech, to transportation, to manufacturing. So there’s been a nominal drop there.”
As the chair-elect of BOMA, Thiessen highlights some issues BOMA members will be watching next year. One is the challenges relative to the city’s development guidelines, particularly in the downtown core. Another is rail setbacks – a major issue since the Lac-Mégantic rail disaster. “[The city] hasn’t begun to articulate this,” Thiessen says.
Application of the forthcoming provincial carbon levy (on January 1) and the City of Calgary Charter (which will enumerate multiple powers of the municipal government) are other stay-awakes for next year.
Property taxes are another major issue for BOMA members – and all Calgarians – in light of declining property values. Given steep declines in downtown values, many are anticipating the city’s assessments. “Is the city going to respond to the market and how it is changing?” Thiessen queries.
Nelson Karpa, acting city treasurer and city assessor for the City of Calgary, confirms commercial property values are expected to be lower. “In the downtown office community we’re probably seeing the biggest downward change in assessed values.” Retail and industrial values are also expected to be down, though to a lesser extent.
As a result, Karpa says there will be a slight shifting of the overall non-residential tax burden paid by downtown offices relative to industrial and retail properties. “[The downtown office property group] will be expected to be shouldering less of the tax burden in the non-residential tax class.”
Residential property taxes, meanwhile, are not expected to change since there are no similar disparities between the different types of properties within the residential tax class. “Most values generally are going to be down, but they’re all going to be down consistently across the city of Calgary,” Karpa says.
Not the brightest forecast for Calgary’s real estate markets in the new year, but not completely bereft of hope either. As we move into 2017, many factors will affect commercial and residential sales, prices and vacancies. In which direction and by how much, only time will tell.