Oil slump hammers Calgary’s downtown office real estate market

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The crushing Alberta recession has wiped out more than $4-billion in value of downtown Calgary office properties, city assessors warned Thursday, with some suburban office landlords and retailers expected to see higher tax bills as a result.

In updated property assessments mailed to more than 540,000 Calgary homeowners and businesses this week, city assessors said falling office rents and a commercial vacancy rate that now tops 25 per cent in the city core have driven down the average value of Calgary's downtown office buildings by 16 per cent this year. Over all, the median value of non-residential properties dropped by 6 per cent.

Among Calgary's most iconic commercial properties, The Bow office tower, owned by H&R Real Estate Investment Trust, saw its assessed value drop by 21.7 per cent to a little more than $1-billion. The assessed value of Bow Valley Square, owned by Oxford Properties Group Inc., the real estate arm of the Ontario Municipal Employees Retirement System, fell by 20.7 per cent.

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Citywide, the total value of office properties dropped from $31.1-billion in 2016 to $26.7-billion this year. Over all, Calgary's property market lost $6-billion in value in the past year amid rising unemployment. The assessments are based on the property values as of last July and don't necessarily reflect current market values.

Falling property assessments don't come as a surprise for Calgary's commercial real estate industry, which has been grappling with a growing glut of empty office space over the past year.

"The bigger story is: How far can this go?" said Greg Kwong, regional managing director for commercial real estate services firm CBRE Ltd. "I can almost guarantee that you're going to see property values drop further."

Calgary's office sector added an additional four-million square feet of unoccupied space in 2016, sending the vacancy rate soaring over the past year, said Bob MacDougall, senior managing director at Cushman & Wakefield Inc. in Calgary. "It's a tough slog for landlords and we have to work really hard to help them try and at least maintain their current position and not slide further," he said.

The city assesses the value of office buildings based on their available rental stream, which has fallen precipitously as tenants have left. Rents for premium A-class buildings have dropped at least 40 per cent since late 2014, Mr. Kwong said. Rents have plummeted as much as 70 per cent for C-class buildings – which tend to be older, smaller, and not connected to the Plus-15 skywalks that link much of downtown Calgary.

CBRE predicted that 2.4 million square feet of new, premium downtown office space will hit the Calgary market this year. Of that, 53 per cent is preleased – meaning vacancy rates could worsen further still. Cushman & Wakefield said it expects vacancy rates in downtown A-class office buildings to top 29 per cent by late next year. Meanwhile, remaining prospective tenants are being offered months of free rent for signing long-term leases, or other inducements.

The plunging value of Calgary's office buildings will likely mean lower tax bills for many of the city's largest downtown office landlords. But that will do little to alleviate the woes of the city's major office landlords, Mr. MacDougall said. "I don't think it's a help at all," he said. "The thing that is going to help our market is going to be a reversal in the fortunes of the companies in the oil exploration business and it's going to require jobs."

Others businesses will have to pick up the slack. Municipal officials warned that nearly two-thirds of commercial property owners – particularly suburban office landlords and retail shopping centres whose property values have fared better – should expect to see their taxes go up, in some cases significantly.

Calgary uses a "revenue-neutral" property tax system, meaning some taxpayers could see their property values go down even as their taxes go up, leaving the city's tax revenues largely unchanged.

City council previously announced it was setting aside $15-million in grants to help struggling small businesses cope with their higher tax bills.

The Calgary Chamber said it will work with the city to see that the grant money is best distributed to the property owners that need it. But the group's president and chief executive officer said the city's strategy of taxing assets no matter what the economic conditions or the individual performance of businesses simply doesn't work.

"What they've done is taken the burden from the downtown commercial properties and put it on the outer suburban properties," said the Chamber's Adam Legge.

For many smaller businesses, he added, the tax hike could contribute to job cuts, reduced services, or firms closing their doors. "We are concerned with what is happening with this economic downturn – businesses being asked for additional dollars when they're getting absolutely nothing in incremental value," Mr. Legge said.

Calgary homeowners will see less of a sticker shock on their tax bills than commercial property owners this year.

Median residential property values fell by an average of 4 per cent, with the typical single-family home dropping $20,000 to $460,000, while the median condo value fell $10,000 to $270,000. The total number of homes and condos worth more than $1-million dropped by more than 2,200.

Half of single-family homeowners will see their property taxes decline this year, while nearly three-quarters of condo owners will also pay less tax in 2017.

Homeowners whose property values went up, or fell by less than 4 per cent, will see a tax hike. Most homeowners will see their taxes rise or fall by less than 5 per cent this year, said Harvey Fairfield, acting director of city assessment.