A FRENZIED PACE!

Calgary office leasing activity a sign of prosperity
Employment growth expected to follow
By Mario Toneguzzi
Calgary Herald October 27, 2011

CALGARY — It is a symbol of both current and future prosperity.

And judging by the record, frenzied pace of leasing activity in the downtown office market, Calgary’s economic fortunes appear to be looking good right now - and down the road.

The leasing activity is sure to lead to future employment growth.

“Companies don’t snap up office space just to lounge in it — if energy companies are expanding their office footprint, they plan on growing their business. This means more drilling, more investment, more jobs and more economic growth for Alberta moving forward,” said Dan Sumner, economist with ATB Financial in Calgary.

Greg Kwong, executive vice-president and regional managing director of CB Richard Ellis Ltd., who moderated a panel discussion on the topic Wednesday at the Calgary Real Estate Forum, said so far this year absorption in the downtown market is 2.2 million square feet.

“To put it into perspective, the average over the last 15 years has been about 750,000 square feet annually. So unbelievable in that respect,” said Kwong. “Why is it happening? Probably two factors. One is if you talk to the oil and gas companies and energy-related services companies that are taking space ... they’re banking space again.

“The second factor is that there was an unusual amount of lease renewals that came up for expiry in the last couple of years and they took advantage of what was deemed to be a slower market.”

Kwong said the difference in the oil and gas industry between today and 30 years ago is that capital budgest and decisions involve billions of dollars being laid out over 10, 15 or 20 years.

Todd Throndson, managing director of Avison Young in Calgary, said many companies are making plans for the long term.

“They want to protect themselves for projects that they may have in six months, in 18 months, in 24 months. Down the road, they’re thinking big picture,” he said. “A lot of companies back in 2006 and 2007 were put in very compromising positions because of their real estate needs. They weren’t able to get the space they wanted. They had to pay a lot more money for the space than what would have been ideal.

“So a lot of them with strong balance sheets are making sure they protect themselves and get their space for their corporate needs going into the future.”

That’s reflected in the downtown office vacancy rate. According to Avison Young, it’s reached its lowest level since early 2009. Over the last three months, downtown office vacancy has dropped from 7.4 per cent to 6.2 per cent.

The addition of skycrapers Eighth Avenue Place and the Bow have not spiked the vacancy rate as was feared a couple of years ago. And demand is fuelling talk of more new development on the horizon.

Bryan Slauko, managing director of Base 10 Capital Advisors, said the amount of absorption implies significant growth in the number of office jobs in Calgary that would be needed to fill those seats. And filling all those seats requires new employees which would mean population growth in Calgary. But population growth can’t match that level of employment growth.

“It begs the question: if there’s not a ton of new office employment currently compared to the historical level to absorb all that office space then in my opinion it seems to mean . . . it’s for speculative growth. They’re planning on growing into that space in the future if the economy holds up and their hiring plans continue,” said Slauko.

“But that comes with a fair amount of risk to the office market because we see today in the economy there’s a lot of global economic uncertainty and I don’t believe Canada is immune and Alberta’s not immune because there’s a lot of risk to the natural resource prices that we depend on.”

And if the economy heads south then potentially a lot of office space will be coming back onto the market for lease.