Why High Office Vacancy Is Good For Calgary

[wgraham]

More ramblings from our blog....

There have been many articles lately outlining the high vacancy rate in Calgary office space. With the new Bow Tower coming online shortly and a few other substantial projects this trend isn`t going to reverse itself anytime soon but will Calgary make lemonade from lemons?

I think the answer is undeniably "Yes!"

Calgary is the head office capital of Canada. Many large corporations such as Telus, Encana, Suncor, etc make Calgary their home base and rightfully so. Calgary`s downtown is an economic hub of finance, oil and gas, technology and infrastructure. In the past decade affordability had gotten a little crazy in the office market. Rents were skyrocketing forcing out some players and making Calgary less attractive. Vacancy was less than 1%.

But times have changed.....vacancy is up (way up) and thus rents are down. In my opinion this will only bring more innovative companies to Calgary bringing with them jobs. And JOBS are the key to any economy.

Jobs bring people putting pressure on housing and rent, increased retail sales, and growth.

In the short term I think we are about to see a slight correction in housing prices. Inventory numbers are up and the future is once again a little muddy with the Credit issues in Europe. The markets are volatile again and the tsx lost about 4% last week. Those with short term views and day trading mentalities are about to have their lunches handed to them. But those who can pull the trigger in these times of turbulence do amazingly well.

The big boys who are building these towers know that vacancy is going to hurt their rents and values in the short term but you don`t build a building like the Bow with out a strong vision of the future. They see it coming. Do you?

 

[bizaro86]

QUOTE (wgraham @ Jul 5 2010, 12:57 PM) The big boys who are building these towers know that vacancy is going to hurt their rents and values in the short term but you don`t build a building like the Bow with out a strong vision of the future. They see it coming. Do you?

The builders of the Bow (H&R Reit) have a multi-decade lease with EnCana, with escalation provisions built in, so they`ll be fine. The buildings that EnCana (and Cenovus) move out of will experience significant vacancy.
Michael

 

[Savard]

I agree that high vacancy is great for Calgary. Great for my tenant clients who are moving to higher quality buildings for less cost than years past. And great for my properties because employers will experience a reduction in operating costs and should be able to afford to hire a new secretary or an engineer who will in turn pay my rent.



I also like the increased inventory of parking stalls that should reduce the cost of parking from one of the highest in North America to a more reasonable level. My article in front page of the Calgary Herald Business section. http://www.calgaryherald.com/business/Calg...0166/story.html



I still believe more Toronto companies will re-locate to Calgary as the reduction in rent costs might get Calgary back to the position of our former “Calgary Advantage”. Calgary Economic Development has been doing great work to try to bring larger companies to Calgary as per your link.



Our Q2 vacancy numbers are showing a significant up take of office space. This has been lead by the oil companies and pent up demand. The gas companies are still on life support (thanks ED). The Q2 absorption numbers are greater than the 10 year trailing average of absorption in the downtown office market. As a leading indicator, this up take of office space is demonstrating a stronger Calgary economy (I only wish my residential rents would go up!!).



Sorry to nitpick Wade- Telus is based from Vancouver and Calgary has the second most head offices in Canada. Most per capita…
There are not many "big boys" in ownership of office towers in Calgary. Most are REIT`s or pension funds or some insurance company ownership. The actual owners are the unit holders who pray the managers will provide a yield that allows them to retire. The managers make their money from salary and bonus and make money when the money has been placed.



If anyone has any questions on the Calgary office market, please feel free to send me a note as I make my living with office leasing.

 

[Savard]

QUOTE (Savard @ Jul 5 2010, 04:41 PM) I agree that high vacancy is great for Calgary. Great for my tenant clients who are moving to higher quality buildings for less cost than years past. And great for my properties because employers will experience a reduction in operating costs and should be able to afford to hire a new secretary or an engineer who will in turn pay my rent.



I also like the increased inventory of parking stalls that should reduce the cost of parking from one of the highest in North America to a more reasonable level. My article in front page of the Calgary Herald Business section. http://www.calgaryherald.com/business/Calg...0166/story.html



I still believe more Toronto companies will re-locate to Calgary as the reduction in rent costs might get Calgary back to the position of our former "Calgary Advantage". Calgary Economic Development has been doing great work to try to bring larger companies to Calgary as per your link.



Our Q2 vacancy numbers are showing a significant up take of office space. This has been lead by the oil companies and pent up demand. The gas companies are still on life support (thanks ED). The Q2 absorption numbers are greater than the 10 year trailing average of absorption in the downtown office market. As a leading indicator, this up take of office space is demonstrating a stronger Calgary economy (I only wish my residential rents would go up!!).



Sorry to nitpick Wade- Telus is based from Vancouver and Calgary has the second most head offices in Canada. Most per capita…
There are not many "big boys" in ownership of office towers in Calgary. Most are REIT`s or pension funds or some insurance company ownership. The actual owners are the unit holders who pray the managers will provide a yield that allows them to retire. The managers make their money from salary and bonus and make money when the money has been placed.



If anyone has any questions on the Calgary office market, please feel free to send me a note as I make my living with office leasing.

Interesting activity at the Land Sales yesterday. http://www.calgaryherald.com/Land+sale+bid...8074/story.html
Energy companies securing more land means more wells being drilled means more jobs means more renters for my houses and hopefully higher rents.
Increased land sales couples with a significant up take of office space as leading indicators tells me that the economy in Calgary is strong and will be stronger in the near future.
Having 13-20% vancancy is a big plus for Calgary as my leasing clients will pay less for their commercial real estate and have more money to hire more of my clients "renters".
Feel free to contact me if you have interest in our Q2 Market Report. Office leasing is a leading indicator on the health of the rental market.

 

[Savard]

There have been many articles lately outlining the high vacancy rate in Calgary office space. With the new Bow Tower coming online shortly and a few other substantial projects this trend isn`t going to reverse itself anytime soon but will Calgary make lemonade from lemons?

Interesting press release that the Bow is now western Canada`s tallest building http://www.calgaryherald.com/tower+becomes...1928/story.html

The Bow is the tallest free standing structure in Canada. Exceeding the CN Tower by almost 2,148 feet. *if you include Calgary`s elevation of 3,438 feet vs. Toronto`s 249 feet. ha ha (Source: Wikipedia)

 

[DaveRhydderch]

Great info here from everyone. Thanks for posting all this.

 

[JDaley]

QUOTE (wgraham @ Jul 5 2010, 12:57 PM) They see it coming. Do you?

No. Same thing happened here in the 1980s and they certainly thought they saw the future bight and shiny. The thing they didn`t count on back then was the NEP and the Federal government. This time its the provincial government who did us in. The Stelmach government underestimated how business would react to their new Royalty regime. Well it tuned out they reacted in exactly the same way as in the 80s. Business barked and growled and warned and Stelmach still pushed ahead and we now have another mess. Calgary`s unemployment is lagging behind the rest of the country, and so is its real estate and the oil&gas sector continues to shed jobs. Let me repeat, high vacancies is NEVER EVER A GOOD THING !!

 

[bizaro86]

QUOTE (JDaley @ Jul 10 2010, 03:41 PM) the oil&gas sector continues to shed jobs.

Do you have any quantitative or qualitative data to back up that statement? I work in the oil and gas industry, and the company I work for is hiring hundreds of people. I also got two calls from headhunters last week desperate for people. The group I`m in has a vacant posting, and they`ve been trying to fill it for quite a while without getting qualified resumes. There are more jobs that need filling than people out looking, at least in my experience.

Michael

 

[JDaley]

QUOTE (bizaro86 @ Jul 11 2010, 04:36 PM) Do you have any quantitative or qualitative data to back up that statement?

yes, read the hearld.

 

[wgraham]

Jobs report posted last week by Stats Can didn`t post an overly bright picture for Alberta job numbers but I do concur that the feeling on the street is that the jobs are coming back! One good sign of a more real time indication is viewing the number of jobs on sites like workoplis and calgaryjobshop.ca. I get the same reading from www.rentfaster.ca the number of active listings are down.

Time will tell but I for one see opportunity for buying strong buy/hold property this fall and winter.

Thanks for your input everyone!

 

[Savard]

QUOTE (JDaley @ Jul 10 2010, 03:41 PM) No. Same thing happened here in the 1980s and they certainly thought they saw the future bight and shiny. The thing they didn`t count on back then was the NEP and the Federal government. This time its the provincial government who did us in. The Stelmach government underestimated how business would react to their new Royalty regime. Well it tuned out they reacted in exactly the same way as in the 80s. Business barked and growled and warned and Stelmach still pushed ahead and we now have another mess. Calgary`s unemployment is lagging behind the rest of the country, and so is its real estate and the oil&gas sector continues to shed jobs. Let me repeat, high vacancies is NEVER EVER A GOOD THING !!

We all agree that Stelmach made a tragic mistake changing the Royalty structure. (Unless you are from BC or Saskatchewan or are a large producer that did not rely on drilling new wells)

What you appear to have missed in my postings and the spirit of Wade’s postings is that: High Vacancy is great for Calgary

· High vacancy in Calgary is mostly due to construction of new inventory.

· Q2 has seen a significant up take of office space in downtown. In fact, Q2 positive absorption is greater than the 10 year trailing average in down town. This is significant as more newly acquired office space equals more bums in seats which means more jobs. I am in this market all day long. You won’t find this in the Herald as I have not given this information to the Herald. Expect to see my competitors submit the article in the coming days.

· We are seeing a flight to quality, whereby the groups that can afford higher quality space are investing in their companies and employee retention. Some companies rationalized a higher expenditure in new office space because they stand a better chance retaining good employees in equal and better space than their competition.

· With the above fact – the E&P and other companies leave behind built out office space in lesser quality buildings – Which means that service companies, engineering companies, law firms and the like have a great many choices for space at prices that are below and equal to pre-boom net rental rates. Some of it is well constructed and may include office furniture
· This high vacancy is great for Calgarians as companies have reduced cost for office space, which means there is more money to spend in other areas. I am hopeful that this means my tenant-clients can pay their rent or more rent J

· More parking inventory = lower parking prices. Which means my… see above

· More office furniture being custom built for Encana = more office furniture inventory and lower prices.

· Having existing inventory in quality buildings may allow a large company to move from Toronto or Montreal. Imperial Oil’s move is said to have been 20 years overdue. Imperial’s move marks to the second the beginning of the boom in Calgary. Calgary was experiencing strong absorption until Imperial secured space and than rates increased a dollar per month for 18 months. Interestingly, Imperial had their sights on BP Centre as the Ontario election produce Dalton McGinty. Fact – In McGinty acceptance speech, McGinty said he was going to raise corporate taxes. Imperials decision was made and Calgary now has the benefit.

· The boom in 1996 was punctuated by CP Rails move.

· Today, if a large company moves or gas goes back to $6-7… put on your sunglasses, it’ll get real bright.





libri-->With respect to Wade’s comments that developers are betting long term in Calgary. I think this is partially right as these development decisions were made in the exuberant boom times, but many would have wished they did not develop as they are owning office space as Calgary heads into a 20% vacancy market. Speculating on new construction is risky and many builders have lost money. There is more to the decision to build as these developers represent fund money. Much of the ownership by funds in un-leveraged. There is more to this than I have time to write.

 

[bizaro86]

QUOTE (wgraham @ Jul 12 2010, 12:50 AM) Jobs report posted last week by Stats Can didn`t post an overly bright picture for Alberta job numbers but I do concur that the feeling on the street is that the jobs are coming back!


Whether the residential property market feels the effect or not, oil and gas jobs are coming back. This wasn`t in the last statscan report, because its trailing data, it measures what happened in the past, not how many jobs there are available. And there are many jobs available downtown at the E&P companies. As I said before, the industry has gone back to using headhunters for unsolicited job offers.

The biggest problem might actually be a lack of qualified people. It`s not like someone laid off at a timber mill or auto plant can come to Calgary and get work as a geologist or engineer, especially when many of the job openings are for people with 5-10 years+ of experience. Whether someone wants to hire a new employee or not, nobody move into a new residence here unless the company actually finds someone to fill the job, which is getting more and more difficult.

Michael

 

[JDaley]

QUOTE (Savard @ Jul 12 2010, 08:42 AM) What you appear to have missed in my postings and the spirit of Wade`s postings is that: High Vacancy is great for Calgary

This is a ridiculous statement and a ridiculous post. No one builds with high-vacancies in mind. The fact of the matter is that the expected demand for commercial property hasn`t materialized because of the economic conditions globally, and mostly because of the provincial mismanagement of the economy. Alberta should have sailed through the economic turmoil, especially at $50-$70/b oil. Its pretty clear you have a stake in painting a rosy picture but the truth is that in June the O&G sector shed 5000 jobs, most jobs were picked up in the services sector and part time. There`s over 2 million sq ft of commercial space coming online next year, vacancies are hovering around 16% and going higher, leases are dropping from $25-$30 sq ft average in the downtown to about $10-$15 sq ft downtown. How is this good ? Let me repeat again HIGH VACANCIES IS NEVER EVER A GOOD THING IN ANY REAL ESTATE BUSINESS! I wouldn`t invest a dime in commercial property in Calgary in the next 2-5 years I`d say, stay away and especially don`t listen to these guys.

 

[wgraham]

QUOTE (JDaley @ Jul 12 2010, 09:10 AM) leases are dropping from $25-$30 sq ft average in the downtown to about $10-$15 sq ft downtown. How is this good ? Let me repeat again HIGH VACANCIES IS NEVER EVER A GOOD THING IN ANY REAL ESTATE BUSINESS! I wouldn`t invest a dime in commercial property in Calgary in the next 2-5 years I`d say, stay away and especially don`t listen to these guys.

Great debate boys!

full disclosure. I don`t own a lick of commercial real estate. Most of my holdings are Calgary residential.

Dropping values and lease rates are not good for those who are currently holding commercial office space but if you are looking to get into the commercial space the next two years looks pretty attractive with some motivated vendors out there.

And you certainly have to admit that low lease rates are very good for businesses (the real driver of the economy)! And this will undoubtedly be good for the job market! And as has been said....butts in seats = more demand for everything.

Yes in the short term those who bough high valued commercial space and leveraged it are going to feel some pain but for everyone else there is sunshine on the horizon.

Poker is a game of patience and well timed aggression.....same holds true for real estate.

 

[Savard]

QUOTE (JDaley @ Jul 12 2010, 09:10 AM) This is a ridiculous statement and a ridiculous post. No one builds with high-vacancies in mind. The fact of the matter is that the expected demand for commercial property hasn`t materialized because of the economic conditions globally, and mostly because of the provincial mismanagement of the economy. Alberta should have sailed through the economic turmoil, especially at $50-$70/b oil. Its pretty clear you have a stake in painting a rosy picture but the truth is that in June the O&G sector shed 5000 jobs, most jobs were picked up in the services sector and part time. There`s over 2 million sq ft of commercial space coming online next year, vacancies are hovering around 16% and going higher, leases are dropping from $25-$30 sq ft average in the downtown to about $10-$15 sq ft downtown. How is this good ? Let me repeat again HIGH VACANCIES IS NEVER EVER A GOOD THING IN ANY REAL ESTATE BUSINESS! I wouldn`t invest a dime in commercial property in Calgary in the next 2-5 years I`d say, stay away and especially don`t listen to these guys.


Sorry to say, but you still seem to be missing the point of the thread. Unless you wish to argue. Which has its benefits as I am taking the time to clarify my posts. Hopefully, any interested parties might find some benefit.

If you are now concerned about the office market from the owner`s perspectives than your point has merit, although I think my comments seperate the benefit to Calgary from the harm the landlords may incur.


Many owners are pension funds that are un leveraged and purchase to provide a yield to the unit holders. Many funds are based outside of Alberta. Yes the yield will be lower. But, in many cases, it still exists as a positive number. Typically, a pension fund will allocate a percentage to real estate and a percentage to bonds and the stock market and individual companies. This amount grows every month/year and has to be placed or the pension fund sits on cash with little or no yield. Therefore, a pension fund needs to place money and can pay higher than a leverage based investor. This speaks to their motivation. Maybe a negative is that Calgary will not be seeing too much new investment in the office market?

(Funny that if you listen to a guy go on at a back yard BBQ about AB transfer payments to Quebec and Ontario – it is interesting to note that pension fund money from Ontario and Quebec have invested hundreds of millions into Calgary. Good for AB, yes? This is on a very macro level and beyond the scope of a brief posting. But something to think about none the less.)



If you are a buyer of office space than you need to factor in the increased vacancy and receive the appropriate discount. Not good for the seller.

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"No one builds with high-vacancies in mind". There are too many issues for me to summarize and agree with this statement. (buyer or builder motivation above) I am only looking at the result of the quality of office space and the net benefit to Calgarians.



"the matter is that the expected demand for commercial property hasn`t materialized because of the economic conditions globally, and mostly because of the provincial mismanagement of the economy" As per above, I have brought forward facts from the downtown office market. My competitors will submit this to the Herald in the coming days/weeks. Demand/uptake of space year to date is greater than the 10 year (full year) trailing average- fact.



Please post any questions and I`ll do my best to provide the facts and my first hand experience from the office market which is a leading indicator for the Calgary economic environment. I am not sure where you are coming from. Your posts speak of NEP and Royalties and very light on facts and sources of information.



Disclosure: I own no office real estate. I am not selling commercial office space. My tenant clients will benefit from higher vacancies and lower cost. I don`t think my office leasing business will feel a great benefit to high vacancies although business is greatest when the market/vacancy is in flux and business is slower when the market is most stable. My residential landlord business should benefit: I hope, as per my posts. (I`m having trouble with the fonts- I am not trying to highlight any comments here)

 

[RedlineBrett]

QUOTE (JDaley @ Jul 12 2010, 09:10 AM) I wouldn`t invest a dime in commercial property in Calgary in the next 2-5 years I`d say, stay away and especially don`t listen to these guys.

Why should we listen to you?

 

[wgraham]

QUOTE (RedlineBrett @ Jul 12 2010, 11:14 AM) Why should we listen to you?

I think what Brett meant was....we know who the other guys in this discussion are and what their credentials are.....but we don`t know much about you other than you are a "forum member".

so JDaley??......