Office vacancy rates in downtown Calgary see little improvement

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Vacancy rates in downtown Calgary continue to improve, but struggles on the west side of the district are holding them back.

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A second quarter report released by Jones Lang LaSalle commercial real estate shows a slight improvement in their numbers, from 29.9% vacancies to 29.7% vacancies in the second quarter of 2022.

It’s a small drop in vacancy, but it’s the second quarter in a row that JLL has posted a lower vacancy rate.

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“I’m optimistic for Calgary,” said Damien Mills, executive vice president of JLL’s tenant advocacy group. “I think we’ve been through a tough period and hopefully we’ll see continued improvement as we go into ’23-’24 and beyond.”

West Core continues to create vacancies downtown. While there are occupancy issues across the board, the western segment of the area has a vacancy rate (45%) that is almost double that of the Core Central (23.9%) and Core East (28.8%).

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Mills said this is largely because other companies are moving to better-located buildings and offices in terms of location and amenities. The central core has been a leader in this with landlords like Aspen Properties upgrading Class A buildings like The Ampersand, making them much more attractive to businesses looking for space. The West has failed to keep up even in its Class A buildings with the merger between Cenovus and Husky vacating Western Canadian Place and Nexen Tower, which accounts for much of the 54.4 percent vacancy in the segment.

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This has led to an increase in the conversion of Class B and C buildings converted to residential, including the former Sierra Place into 100,000 square feet of low-income housing, while an additional 400,000 square feet were approved for conversion, including 200,000 square feet of Palliser One’s top floors for high-end housing.

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Mills said it will take a number of approaches including more conversions and renovations, as well as potentially some demolitions to properly address vacancy rates in the core.

“It is difficult and they will have to make the economic balance between investing in infrastructure with uncertain results or going back to a completely different purpose,” he said. “And I think the key is that those who are just waiting for the market to come back and are not proactive will be hurt.”

A key indicator of downtown’s recovery, which was hit hard by the last recession in 2015, along with the pandemic, is that rents are beginning to rise. However, they are still affordable and in some cases cheaper than office space in the suburbs and outside the center, which will help drive businesses into the towers.

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“As we look at the employee experience as a driver, that is now driving this flight towards quality, access and egress of their employees to their workplace,” Mills said. “The center has the seriousness.”

While the city has placed a heavy emphasis on diversification and the tech sector, oil and gas still dominate the space and likely will in the future.

Booming Industrial Properties

It is an owner market in the industrial property space with a 1.7 percent vacancy rate and construction levels that are not keeping up with demand.

Much of the 7.28 million square feet under construction is already being picked up, and prospective tenants are being forced to look further into the future to find the right space. The developers have seized the opportunity with much of the new development entirely speculative.

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Marshall Toner, JLL Canada’s industrial executive vice president, said it will likely be late 2023, early 2024 before balance returns to the segment. That’s a big change from 2019, when the vacancy rate was around nine percent.

“We’ve had a very buoyant market with a lot of dealing with speed,” he said. “We have what I would call a healthy industrial market.”

Industrial space in Calgary has doubled since the 1990s, when there was around 75 million square feet of inventory. There are now 157.9 million square feet with another 7.3 million under construction.

Most of the space is storage rather than manufacturing, due to the development of e-commerce during the pandemic. While there have been major developments from the likes of Amazon and Walmart, it goes way beyond those megaliths. In many cases, companies are now stockpiling inventory in the wake of supply chain issues and sourcing stock from Asia.

“The driving force behind this is distribution,” he said.

There are some challenges on the horizon, notably inflation and interest rates. Toner said how they proceed will depend on the company. Some will build or expand regardless of increases to get that footprint, while others may put their plans on hold.

Still, he said Calgary is an attractive market for businesses with land worth a fraction of the price compared to Vancouver and Toronto.

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Twitter: @JoshAldrich03