In what’s being characterized as a “flight to quality,” Calgary’s downtown office sector has seen plenty of action in the first half of 2023 – just not the drop in vacancy rates that many still want to see.
After years of challenging conditions that’s led to some of the highest vacancy rates in Canada, experts say leasing activity in our city’s core has been incredibly active during the first two quarters of the year.
Yet most of that activity is represented by existing downtown tenants trading up for more centrally-located, amenity-rich buildings, thereby leaving many areas on the fringes feeling largely empty.
“There are two different downtowns, and they are worlds apart,” says Lori King, principal and senior vice-president with CORE Commercial Real Estate. “Over the last year, there has been a huge flight from the west end into the centre core as tenants moved up into a better area. And as the west end has emptied out, it has just become a sadder and sadder.”
Adds Jeff Thomson, principal and executive vice-president with CORE: “It’s a tale of two cities in that once you come east of 5 Street S.W., the Plus 15s are bustling. They’re full of people at lunch hour. Whereas if you go to the west end, it’s empty.”
This activity is illustrated in what King and Thomson describe as very nuanced vacancy rates.
CORE’s market update for the second quarter of 2023 shows the vacancy rates of A and AA class buildings within the centre of downtown – which is generally defined as Centre Street to 5 or 6 Street S.W. – is as low as 15 per cent. This is leading many landlords to increase leasing rates as much as 50 per cent.
“Eight months ago in Bow Valley Square, you could lease space for $12 per square foot. And that went to $18 overnight,” says King.
Meanwhile, vacancy rates for B and C class, which is generally found outside of the centre core, is well over 30 per cent – 40 per cent in the case of B Class.
CORE reported an overall vacancy rate of 29.5 per cent over the first half of 2023.
John Savard, owner at Bedrock Realty Advisors, notes this flight to quality doesn’t mean there still isn’t demand for B and C class properties.
“We just have to get through a significant amount of vacancy,” he says. “But there’s still demand in B to C class. In fact, there are a significant number of tenants who enjoy the mid-west portion of downtown Calgary because the rates are considerably lower than A class.”
Quality isn’t the only difference within Calgary’s downtown office market. In some cases, it can also be quantity.
“It’s nuanced based on how much space you’re looking at, too,” says Thomson. “If you want 15,000 square feet, there are going to be a couple of hundred alternatives. Yet if you want 4,000 square feet that’s office intensive with a bit of open area, well, there are not very many options.
“So, yes, the market is substantially in the favour of tenant. But if you’re looking at 2,000 square feet, there’s only going to be a handful of options that would fit your needs.”
Also favoring the tenant is a smorgasbord of amenities that have become almost standard as landlords look to meet demand for spaces that feel like home. That comes as no surprise to David Wallach, owner/broker at Barclay Street Real Estate, who says return-to-work policies instituted by many companies post-pandemic created a trickle effect.
“If I’m a landlord, my competition now is also against the kitchen table. If you don’t provide them with fun and attractive spaces, then that space is now obsolete,” he says.
Adds Thomson: “I was just on a call with a tech group … and of the nine alternatives that were on the list, they only want to see six of them because the other three didn’t have any amenities. They wanted to continue to have amenities for their staff because they know it’s what is going to attract them back to the office and keep them there.”
Savard cites landlords such as Aspen Properties as doing great work at redefining the once-standard blueprint of downtown office towers in Calgary. Just some of the amenities between Apsen’s Edison and Ampersand towers on 9 Avenue S.W. and 4 Avenue S.W. include indoor basketball courts, golf simulators, tenant lounges, full-service fitness clubs and bike-sharing programs.
“Tenants are really drawn to those amenities,” says Savard. “So, yes, we’re seeing landlords, when they can, create amenity packages to attract tenants in an extremely competitive market.”
Adds Wallach: “There’s a reason why it’s called return on investment. These are perfect examples of how you can change the discussion and have people wanting to be in your space.”
The other challenge that the City needs to overcome is safety, says Wallach. He cites security as an ongoing concern among existing tenants downtown, as well as an obstacle to why many others are staying away.
“It’s a major issue that people don’t want to talk about,” says Wallach. “Employees are not feeling comfortable on transit. They don’t feel comfortable walking through the streets. I’ve been here more than 20 years, and I’ve never seen it as bad as it is right now.”
“So, sure, we can find you space downtown. No problem. But will your employees want to come here?”
Wallach believes one of the solutions to this issue is in attracting more post-secondaries downtown, as he says they bring a fresh vibrancy to the area. He points to the University of Calgary’s School of Architecture, Planning and Landscape located within the former Central Library building as an example of how to successfully repurpose existing spaces.
He also credits the work being done by the City of Calgary on its commercial-to-residential conversion initiative. Announced in 2021, the downtown development incentive program grants developers $75 per square foot of vacant office space being converted to residential.
The goal is to remove six million square feet of office space from the downtown area by 2031. So far, an estimated two million square feet of office space is slated to come off the market, including an announcement this past spring of five conversions that will convert nearly 500,000 square feet of empty or underused space into 530 residential units.
“Those buildings were never going to get occupied. So, this will really help to reduce vacancy rates, as well as bring people back downtown,” says Wallach.
Looking forward, Thomson is bullish on the direction of Calgary’s downtown office market – largely because of a noticeable swing in the types of tenants she’s working with lately.
“Probably 60 to 70 per cent of the clients we’re working on right now are tech focused or tech companies … compared with five per cent pre pandemic. So, you’re seeing an explosion in that market. Ultimately, they all want to be downtown,” he says.
Adds King: “There’s definitely a positive lining with all this movement that we’re seeing downtown. While tech used to be a very small percentage of the downtown core, it is now becoming a substantial amount of the new business.”