While downtown Calgary is primarily a place of work, it is also a hot topic of conversation these days. Although overall downtown is still plagued by high vacancy, limited activity in the evenings and weekends and aging office stock in certain areas, it is also backed by: a) one of the highest back to office ratios in North America, and b) significant inventory of new and state of the art office buildings. A robust local economy balances out what is a dynamic and quickly evolving office market. So, what is actually going on downtown these days?
Office to Residential Conversions
While many North American cities are talking about office to residential conversion, Calgary is getting it done. With the combination of city incentives and a Class B/C office market that has been over a third vacant for years, we are leading the way in this new trend with 10 projects currently approved and/or underway. The rough math is that the city will provide an incentive of $75.00 per square foot of the building once the conversion has been completed. As it turns out, this is the rough value of many of these dated office building, so essentially the city will buy the building if the developer pays for the conversion (which is significantly higher than the City’s contribution). The trick to this is the building must be vacant of office tenants and of a floor plate size that is suitable for conversion (too big and the apartments would resemble bowling lanes, too small and they are economically unfeasible). This will take over one million square feet of archaic office space out of inventory and replace it with 1,200 units of affordable housing – talk about a win-win.
Back to Office Policy
This a somewhat sensitive and fiercely debated topic but one thing that is consistent amongst the companies we help is that management wants their employees in the office, and employees want flexibility to work in the way of their choosing. Typically, this includes a flexible work from home component while at the same time having a fully set up workspace in the office. Companies are trying to balance these competing priorities and workplace policy is becoming a talent and recruitment issue – especially as the job market for oil & gas office workers tightens. Some companies have gone with a 100% back to the office policy, while others have 2-3 days per week in the office policy. Few, if any, large private sector downtown employers have fully embraced remote work. However, some smaller tech and service companies have gone this route – for the most part to eliminate the cost of an office, given their people had flexibility pre-pandemic anyways. Given the desire for companies to have employees in the office at least part time, we are not seeing remote work drive a meaningful reduction in occupied office space. However, we do see companies less worried about growth (either organic or by way of acquisition) and their long-term office footprints, as employees can now be added on a flexible work arrangement and current design trends are leading to increased efficiency in how space is utilized.
Every Building is a Third Empty, Right?
While the headline vacancy rate is pushing 30% and amongst the highest in any major market in the world, the reality in downtown Calgary is much different. Large blocks of vacant space are concentrated in a handful of buildings, primarily west of Fifth Street. When our clients ask us to go find well built out space in a higher-end, centrally located building, the 30% vacancy rate feels like an illusion, and it takes some savviness to meet this requirement. Looking for 10,000 square feet of older office space in a dated class B building? It would take a week to tour all the options. However, if 40,000 square feet of well built out space in a newer class AA building is the ticket, we can count the options on both hands. This is a marked change from the 2015 – 2021 period and is contributing to higher rents in quality buildings, while the mid-tier buildings still struggle with bleak economic transactions. An interesting statistic is that in the AA market (approx. 20 of the best buildings in town) the head lease vacancy rate is only 7%; in other words, landlords are collecting rent on 93% of the space in this market. This is not the office market the headlines would have you believe and is in stark contrast to the lower end of the market.
Ten years ago, the top amenities in office buildings consisted of a small gym and a basic conference centre that resembles a university classroom. Things have changed. The high vacancy rates and competition for active tenancies have meant two things; 1) landlord’s need to get creative and differentiate their buildings from the competition; and 2) many buildings have sufficient vacant space in retail podiums or second floor areas to create substantial amenities. It is now common to see a state-of-the-art tenant lounge complete with beer taps and video games, conference centres that resemble high-end boutique hotels, expansive fitness centres similar to a private club, golf simulators and one building even has an indoor basketball court. Food courts are being converted to food halls with high-end vendors and adult beverages. Dogs are now allowed in certain buildings, and we even see a few properties with resident beehives producing building branded honey. A full office building doesn’t give a landlord incentive to spend money on amenities, and Calgary’s high vacancy rate had led to us being on the leading edge of modernizing dated buildings.
With the 2005 to 2018 development cycle providing Calgary with numerous new skyscrapers, the current high vacancy rate has many people asking if (or when) we will again see a new downtown office tower. This is an interesting question as on the surface the answer would be “not until vacancy rates come down to a balanced market of 8-12%”. However, the insightful answer is more nuanced than this. Currently, the largest block of contiguous vacancy is ~600,000 square feet in 801 Seventh (the old Nexen Building). There are 4 pockets of space over 250,000 and only one of them is in a modern updated building that most large tenants would deem viable options. With downtown Calgary having several very large companies, and some of theses companies having upcoming lease expiries, their only options will be to stay in their current premises or build a new building. There are a handful of premium development sites left downtown, and the potential exists for a large company to kick off a new building. The biggest headwind to this is that current construction costs would require rental rates far above today’s market, meaning a company would need to be prepared to pay a significant premium over their status quo. Is that the kind of thing a large energy company is prepared to do? In 2005 the answer was yes. Today the answer seems to be no, but only time will tell what the future answer is.