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Calgary’s Commercial Real Estate Crunch

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On every level—personal, social and business— Calgary’s grit, resilience and spirit has been tested. By all indications, it has been a triple whammy: the oil slump, the economy and, of course Covid-19 and the lockdown.

Although a slow and fragile Calgary recovery has begun, there is widespread consensus that a more stable recovery—particularly in business and when it comes to public confidence—may not really take hold until a vaccine is developed, approved and available.

The triple whammy hit on Calgary’s commercial real estate sector has been significant. Matt Rachiele, Managing Director of Colliers Calgary and co-chair of this year’s Alberta Real Estate Forum virtual conference explains that the commercial real estate sector was already in recovery mode, when Covid-19 struck. “We had great momentum coming into 2020 across all three verticals—office, industrial and retail. Despite vacancy rates in the mid-20’s, Downtown Office activity had been buoyed by forward looking transactions where tenants were renegotiating their leases or exiting them early in order to capitalize on lower rates or meet space requirements.”

Some business analysts point out that lockdown was not so much a sudden, brick wall crash for Calgary’s commercial real estate sector. It was more like piling-on.

“Yes, the first quarter was decent for leasing activity,” says Greg Kwong, regional managing director with CBRE Calgary. “Then Covid-19 happened and the world shut down.”

Peter Norman, vice president and chief economist with the Altus Group explains the perfect storm which struck Calgary’s commercial real estate. “The Calgary sector  was in significant stress even prior to the lockdown and the energy sector woes of this past spring. The vacancy rates on office space have been in excess of 20 per cent for four years and even higher in the downtown.

“Over the past seven years up to 2019, the net amount of occupied space declined by almost three million square feet. The Lockdown and further downsizing in the energy sector is exacerbating the situation in 2020, with close to a further one million square feet of vacated space emerging in the past year. The other trends that existed and have continue to exist through this year combined with the shift in demand for office space out of the downtown and toward suburban nodes.”

Rachiele explains that the 2020 impact took different tolls on Calgary’s commercial real estate. “Industrial remains at mid-single digit vacancy rate levels while retail vacancy has nearly tripled through the lockdown to low double-digit figures, with likely more pressure to come based on the uncertainty of the restaurant and bar industry now that patio season has ended. Downtown and Beltline street front retail has been particularly hard hit, with grocery anchored and service-based shopping centers fairing the best.”

Business in Calgary asked Kwong to crunch some recent commercial real estate numbers, to get a more realistic read. He notes that Calgary’s Q2 2020 office vacancy numbers are: Downtown Office 27.0 per cent and Suburban Office 20.2 per cent. There is consensus among many Calgary commercial real estate experts that the this year’s Covid-19 broadside, the post-lockdown downtown office vacancy rate is probably a reflection of a leasing trend the City has been struggling with since oil prices collapsed five years ago.

“Historically, the commercial real estate sector in Calgary has been very sensitive to oil prices,” Norman points out. “A strong bounce back in prices will certainly be positive, but structural changes in the energy sector may mitigate the upside spin off benefits this next time.

“No doubt about it. The primary driver of changes in the office sector in recent years have been cyclical and structure changes in the oil sector. Those are continuing. Also, similar to other markets, Calgary has seen some efficiency of space use by companies, as they fit desks closer together and reduce overall space need. But this office space trend will probably reverse somewhat going forward as office design trends cope with the needs for greater social distancing in the workplace.”

Some say the short and long term future of “the workplace” is a vital, lynchpin factor for commercial office real estate: how people work and where people work.

A recent Angus Reid survey found that almost three in 10 Canadians are (or were) working from home as a result of employer safeguards about public health and the possibility of spreading and infections in the workplace. About 20 per cent of those surveyed said they expect to continue working by-remote once the pandemic ends, but more than a third expected to go back to the office. The largest group, almost 45 per cent, think work will be a combination of both.

The ability of many employers and employees to quickly transition from an office environment to working at the kitchen table proves that, at least in the short run, it can technically be done and not impact productivity. But as businesses wind-up 2020, forecasting of needed office space is a key (and tricky) planning aspect.

“We believe it will have a minor effect over the long term,” Kwong says. “What companies are saying now is that flexibility is more important and there is probably a work-from-home fatigue setting in. Besides, we are still social creatures. Most people aren’t designed to work in isolation in their houses.”

Peter Norman anticipates the new work approaches will have significant impact. “We are in the midst of a paradigm shift in behavior which will cause a permanent change in our need for office space. Not eliminate it, but certainly change the path. Nationally as well as Calgary, dealing with this shift will be a challenge.

“Most office workers worked from home during the lockdown and both the workers and companies quickly adapted, with greater or lesser success. Many companies and workers now realize that it’s not easy or always productive,” he says. “For some, the new way of working will stick. We think that person-days in the office will decline by 10 or 20 per cent. Some companies are going entirely virtual, some workers shifting permanently to remote work and some workers adopting a flexible schedule with a mix of remote and in-office work.”

Matt Rachiele underscores the impact of new workplace habits on the commercial office real estate sector. “Work from home will be an integral part of go-forward office requirements, but we fully expect that Calgary office employees still enjoy the personal interactions and relationships that only an office can facilitate,” he adds. “At some point there will see a sizeable push to have a majority of staff return to the office, but timing varies by tenant and dovetails into HR and legal liability considerations.

“The other factor at play in all of this is the offset between reduced in-office headcounts and greater space requirements for those who remain, particularly for those who had steadily moved to increased densification in their spaces.”

For Calgary’s commercial real estate sector, there seems to be gradual light at the end of a particularly nasty and dark tunnel. “On the basis that a vaccine is secured early in 2021 and widely available in the first half of the year, I believe we will see a steady rise in activity through in 2020,” Rachiele says with positivity. “And recovery to normalized levels in 2022, at least in the office and industrial sectors. Retail will likely recover more slowly. But Calgary is resilient and entrepreneurial, and as a whole, we always seem to find a way. Never bet against this City or its people!”

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