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Since 2010, Alberta has been the largest provincial contributor to the country’s economic growth. Alberta’s economy has been strengthened by ongoing investment in the oilsands, and a very resilient labor market. The Canadian oil and gas industry continues to benefit from ongoing global macroeconomic growth. In downtown Calgary, growth in the energy sector has been the primary driver for demand in office space.
Despite the positive outlook for the economy as a whole, activity in the downtown Calgary office market has been subdued throughout the latter half of 2012 and all of 2013. Many tenants’ growth projections have not been realized and consequently, the downtown office market has seen a sizeable increase in sublease availability and an overall rise in the vacancy rate. Vacancy is also expected to rise from 2014 to 2018 as new office developments are completed.
Real estate development companies do not see this as a discouraging factor, as over five million square feet of new inventory is expected for business occupancy by the end of 2018. This represents nearly a 13% increase in the total inventory of downtown Calgary’s office space; exceeding current development within central business districts of all major Canadian cities (Figure 1.0) This significant amount of new office development is a result of strong office space demand from 2010 to 2012.
Calgary is a very cyclical market due to the dominance of the energy sector, which comprises over 70% of office space utilization in the downtown core. Due to this high demand, many oil and gas tenants become trapped in a “herd mentality” when it comes to leasing office space. The energy sector can be volatile, and when the market gains momentum, oil and gas tenants find themselves competing for space with other growing competitors, lowering vacancies, and creating upward pressure on rental rates. When market conditions soften, oil and gas tenants find themselves marketing excess space when many of their competitors are doing the same thing, therefore increasing the supply of office space and driving down achievable sublease rental rates.
With uncertainty in proposed regulatory criteria, a shortage of transportation infrastructure, growing oil and gas production, and the resulting differential in Canadian energy prices relative to other world benchmark energy prices, growth in the Canadian energy sector can be difficult to project. From a office leasing perspective, lease flexibility is crucial for oil and gas tenants.
Tenants in the energy sector require lease flexibility in order to manage their changing office space requirements. In addition to negotiating favorable business terms, oil and gas tenants require negotiation expertise in providing a higher level of flexibility for dealing with expansion and contraction of their office space requirements.
With respect to the industrial market, developers continue to see strength and opportunity, which is reflective of improving economic conditions and confidence in the energy sector as a whole. The combination of transporting oil by rail in addition to new pipeline capacity and the prospect of LNG export facilities on the Canadian West Coast continues to provide optimism. Furthermore, Alberta recently broke ground on the first new refinery in decades. The $5.7 billion dollar investment will not only employ 3,000 people, but will stimulate the manufacturing sector with its construction. Long term, this refinery will also help to reduce the price differential between Western Canada Select and West Texas Intermediate benchmark pricing. There is confidence that these factors will increase revenues in the energy sector and serve as a catalyst to growth of related industries. It is apparent that developers are continuing to plan and build new industrial developments, which shows confidence in our market and the future of the Alberta economy.
Market knowledge of developing trends within the Calgary commercial real estate market and a high level of negotiating expertise is invaluable for Canadian energy companies. With the downtown Calgary office market being so broadly influenced by market fundamentals in the energy sector, overall market volatility is more prevalent than in other office markets. Colliers International prides itself on taking initiative and bringing expertise in all major energy markets worldwide. Our understanding of client needs and local market dynamics results in our ability to align your real estate solutions with your business goals.
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