A glut of sublease space and demand for short-term leases challenge Prairie office markets, but some investors spot opportunity
Calgary could see downtown office vacancy rates spike to 30 per cent this year and other Prairie cities also face challenges in 2021, but some investors still see an opportunity.
Calgary’s downtown office vacancy rate increased to 25.7 per cent – up from 24.6 per cent a year ago – in the third quarter (Q3) 2020, with four office towers totally empty and another five at 25 per cent occupancy or less, Avison Young reported.
There is now nearly 11.9 million square feet of vacant offices downtown and another 4.6 million square feet empty in Calgary’s suburban markets.
Yet some large investors remain bullish on the future of Calgary’s office market, according to the Network, a market analysis firm.
Calgary office investment reached $187.8 million with 14 sales in 2020, an 86 per cent increase compared to 2019, Network reported. The boost was due in large part to the sales of 110 – 12th Avenue SW for $50 million and the sale of Stampede Station for $35 million in the first quarter of 2020. Both were sold by Artis Real Estate Investment Trust to Crestpoint Real Estate Investments Ltd. Rounding-out the top office transactions was the $27.5 million sale of 6807 Railway Street by Calgary Railway Ltd.
“It is not as bad as it looks,” commented Susan Thompson, Avison Young, Calgary, research manager, noting that the overall downtown vacancy is slightly lower than at the 2017 peak, and that most the empty downtown towers are smaller properties. The exception is the near-600,000-square-foot Nexen tower, which has been empty for a year.
In the third quarter, office absorption – total leases minus sublease space returned to the market – in downtown Calgary went negative by 311,000 square feet, the worst performance for any quarter since Q3 2016 when 1.2 million square feet of space was shoved back onto the market. Of the current 11.9 million square feet of vacant space downtown, 21 per cent of it is sublease space, reports Avison Young.
However, there are 41 downtown office towers in Calgary that have no vacancies at all, representing about 17 per cent of the total downtown office inventory.
The office sector is not much stronger outside of downtown. The vacancy rate in the neighbouring Beltline is 22.5 per cent, up from 22.2 per cent a year ago, but it is the only submarket where the absorption was positive, gaining 33,000 square feet of lease-up in 2020.
In the suburbs, the overall office vacancy rate in the third quarter was 19.6 per cent and absorption went negative by nearly 600,000 square feet.
In a best-case scenario looking into 2021, Calgary’s downtown office vacancy rate will remain at current levels: in the worst-case, it would spike above 30 per cent, according to Avison Young.
Edmonton: Edmonton posted 57,843 square feet of negative net office space absorption as of the third quarter of 2020, leaving 2020 net occupancy losses at around 76,000 square feet. There is now nearly 600,000 square feet of sublease space across the Edmonton region.
Given these developments, downtown vacancy increased by 0.5 per cent, from 18.8 percent in Q2 to 19.3 percent, while the suburban vacancy remained steady, quarter over quarter, at 18.6 percent in the third quarter.
“Despite elevated levels of uncertainty in Alberta due to the ongoing pandemic and energy market turmoil, high quality Edmonton office product is still attractive to investors,” JLL reported, pointing to the Q3 sale of Sun Life Place to Slate Asset Management for $32.5 million.
The recently completed Class AA Raymond Block, on a prominent corner in the Whyte Avenue area, is currently listed at $70 million.
“Edmonton office market has settled into a new normal,” noted JLL Canada in a third quarter 2020 report, suggesting office demand will remain subdued into 2021.
Sublease availability increased by 15.3 percent from the second quarter to 597,266 square feet as of October 1, 2020.
Saskatoon: Saskatoon’s downtown office vacancy rate is now around 14.7 per cent and sublease space has increased, as absorption of space went negative by more than 42,000 square feet in the third quarter of 2020.
“Supply has surpassed demand,” ICR Commercial stated in its most recent market survey.
That supply will get a big boost early this year as the 18-storey, 180,000-square-foot Nutrien Tower completes at River Landing as Saskatchewan’s tallest office tower.
Office building owners are upgrading and adding amenities, ICR noted, as new office space joins a competitive market.
The general outlook is slightly higher vacancy rates and flat lease rates in Saskatoon during 2021.
Winnipeg: The office vacancy rate in Winnipeg is around 13 per cent, just slightly higher than in 2019 but the outlook for this year is uncertain.
The wild card is the addition of True North Square that added 350,000 square feet of prime downtown office space as the largest office development in decades. The complex, which includes a 17-storey office building a 24-storey apartment and commercial tower that opened in 2019, has a fifth office tower of 300,000 square feet that begins construction this year, and has been leased for the new headquarters of Wawanesa Mutual Insurance Co.
Like all western cities, Winnipeg saw negative lease-up in 2020, with 26,000 square feet coming back to the market last year, most of it in the downtown.
As many tenants have opted for short-term leases or extensions of existing leases, Colliers Canada said it is hard to get a clear picture of the timeline for relocation or lease renewals going into 2021.
Office net leasing rates are holding steady in Winnipeg however, rising to $16.53 square feet, up modestly from year earlier as of the end of the third quarter of last year, industry reports note.