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It wouldn’t be right to say the collapse of oil prices has turned Canada’s once-thriving oil capital of Calgary into a ghost town. But compared to its recent history and its real estate future, it wouldn’t be entirely wrong, either.
Somehow it’s hard to think of anything but a void when vacancy rates are nearing 15 percent in ultramodern steel-and-glass office towers.
Real estate brokers say vacancy rates are at a five-year high and rents are at their lowest in 11 years, all because of deep cuts in the number of energy company employees who once populated these office buildings. Tenants are seeking breaks in rent or even subleasing their offices at cut-rate prices.
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That would be bad enough, but the amount of office space is on the verge of expanding: By 2018, five new office towers will be completed in Calgary, offering nearly 4 million square feet of additional space that simply won’t be filled unless oil prices begin to recover.
Alexi Olcheski, an office-leasing principal at Avison Young Canada Inc. in Calgary, is calling the situation “a bloodbath. We’re at the highest point of fear and uncertainty now.”
The Los Angeles-based commercial real estate company CBRE Group Inc. says the vacancy rate in downtown Calgary rose to 14 percent during the third quarter of 2015. Add to that about 2 million square feet of what’s called “shadow vacancy” – space that energy companies have leased but can’t fill, CBRE says. If you include that, vacancy in Calgary is up to 16 percent.
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Calgary’s vacancy rate is far higher than normal in Canada, the real estate company says. In Toronto, for example, it says the vacancy rate for office space is only 5 percent.
Besides oil companies, the victims of the oil slump include Artis REIT (Real-Estate Investment Trust), whose stock has lost about 14 percent of its value in the past year; Dream Office REIT, down 27 percent; and Morguard Corp., whose stock is worth 5.1 percent less.
A month ago, the Canadian real estate giant Newmark Knight Frank Devencore reported that Calgary office vacancies, also called “negative absorption,” was 548,700 square feet in the third quarter, bringing the total for the year until then to nearly 1.85 million square feet, a record for the city. The previous record, set in 2009, was 1.625 square feet, the company said.
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“The pace of additional space coming on the market picked up when compared to the second quarter of this year,” Michael Gugliuk, Newmark Knight’s vice president, told the Edmonton Journal. “A few large energy and energy-services firms announced or initiated sizable layoffs during the third quarter which helped translate to just over 400,000 square feet of sublease space coming on the market.”
And things are only getting worse, according to Gugliuk. “Since the report was done, we’ve already seen another firm Harvest Operations put two floors onto the sublease market,” he said. “That’s another 28,500 square feet.”
Alex Carrick, the chief economist at the business information company CMD Group in Norcross, Ga., told the Journal of Commerce that there doesn’t seem to be any relief in sight for Calgary’s commercial real estate market.
“I’d be surprised if there would be anyone who’d be pushing ahead with new [construction] projects right now,” Carrick said.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com