Energy companies already grappling with the sharp drop in crude prices are confronting a new problem: finding tenants to lease a glut of unused office space.
Skidding oil prices have led to record levels of unleased space in Calgary’s downtown market, pushing vacancy rates higher as the energy industry slashes spending and employees to cope with one of the worst downturns in years.
Companies are seeking to lease a record 2.6 million square feet of office space, amounting to 52 per cent of downtown vacancies as of June 30, according to Colliers International.
The surge, the third-consecutive quarter of increases, marks the first time since the financial crisis that the availability of sublease space has surpassed head-lease space, or direct deals between landlords and tenants, Colliers said. It points to lingering weakness in Alberta’s dominant industry despite months of budget cuts and a sharp pullback in activity levels, as crude prices remain subdued at about $50 (U.S.) a barrel.
“It tells you that energy companies are contracting, that they’re looking at their cost footprint and that they’re looking at space as a part of that equation,” said Joe Binfet, a managing director and broker at Colliers in Calgary.
“They basically have more space than they need.”
In the second quarter, the city’s overall commercial vacancy rate spiked to 12.75 per cent, up 20 per cent from the first three months of the year, Colliers said. That has pushed down lease rates in some of the city’s marquee office towers, according to the brokerage.
Colliers sees the vacancy rate climbing as high as 17.5 per cent by year-end 2018, a sharp reversal for a once-booming market.
As recently as 2012, the opening of Encana Corp.’s Bow tower signalled an industry on the rise. At the time, oil prices were in the triple digits, and the southern Alberta city was marked by building shortages and sky-high rents.
Today, the market is reeling, lease rates have plummeted and new construction threatens to exacerbate a glut of supply.
The average rental rate for so-called Class A buildings fell to $26 a square foot in the second quarter, down from $28 in the first quarter of 2015, according to Colliers. At the same time, nearly four million square feet of new space will hit the market by 2018 – the result of a building boom that started long before oil prices hit the skids.
The new buildings are nearing completion amid one of the shakiest energy markets in years. Some companies have eliminated thousands of positions from industry payrolls.
Earlier this year, China’s CNOOC Ltd. shut down Nexen Energy ULC’s Calgary-based oil-trading desk, leading to 100 job cuts. Separately, the company also culled 400 jobs from its North American and North Sea operations. Cenovus Energy Inc. slashed 800 positions, while Suncor Energy Inc. has cut 1,200 jobs.
Not all subleasing efforts are driven by oil’s collapse. A spokeswoman for Cenovus said the company aims to sublet slightly less than half of the roughly one million square feet of space the company occupies at the Bow. That effort began before oil prices sank, Sonja Franklin said. Cenovus has secured about one million square feet of space at Brookfield Place, a 56-storey tower under construction where it plans to move some of its staff starting in 2018.
Industry experts say reported layoffs do not match up with listed vacancies, meaning actual vacancy rates could be higher than the data show. That is in part because some larger companies are holding on to vacant space in hopes of a rebound in energy markets. Others are reluctant to sublease space in a soft market.
“By hanging on to it, should things rebound, they can utilize the space at relatively low rates, whereas if they were to sublease it now they’d have to release it at a much higher cost should things improve and they need more space,” Mr. Binfet said.Report Typo/Error