Cadillac Fairview’s mixed-use project, City Centre project, the tallest tower from the left in this rendering, will be located next to the Bow River parkway system and will be connected to the heart of Calgary’s business community.
The demand for office space in Calgary has dampened a little amid a degree of uncertainty about prospects for the all-important energy sector, but real estate players say they aren't expecting anything more than a blip.
The health of Calgary's office market still rests on the success of major oil and gas firms, although downtown developers note that the city's boom-bust nature has been tempered. The region's economy and government coffers are largely dependent on the energy sector as well, and the province dramatically cut its forecasted resource revenues this year, resulting in rising deficit projections.
Natural gas prices have been under pressure, and some heavy-oil producers have scaled back expansion plans and cut budgets as the prolonged difficulty of transporting Western Canada's heavy oil to other markets has resulted in price discounts.
After a go-go period during which vacancy rates were falling and rents were rising, this year feels like a bit of a lull. Many tenants are stuck in a holding pattern.
The industry has been long awaiting news on pipelines that could be a boon for the sector. But U.S. government approval of TransCanada's Keystone XL pipeline, which would carry crude from the oil sands to U.S. markets, is facing fierce opposition from environmental groups. And if the NDP wins British Columbia's current election, then Enbridge's Northern Gateway pipeline – which would carry crude to the coast to be sent to Asia – will face a new review.
Amid the resulting uncertainty, a growing number of Calgary office tenants have been subletting space, suggesting they now need less room than they originally thought when they signed their leases.
On the flip side, the discount on Canadian oil has been dissipating, natural gas prices have picked up this month, and players say that all it would take is one piece of good news – such as the approval of one of the pipelines – to get the market revving again.
Cushman & Wakefield Canada CEO Pierre Bergevin calls Calgary "the most dynamic market in the country."
"We've seen some shelving of oil and gas projects that now is trickling down and impacting the energy companies, and therefore the engineering companies, and some of that space is coming back onto the market," he said.
But he adds that "if the prices of oil and gas rebound, you'll see a renewed demand for the engineering firms taking up space. And if either the XL or the Gateway pipeline gets approval, this market could turn around in a flash."
There are now at least five office projects planned or under construction, including Brookfield Office Properties Inc.'s $1-billion-plus project called 225 Sixth, which could include the city's tallest building (Brookfield proposed a 56-storey or 247-metre-tall tower as well as another 42-storey building, and the project is scheduled to become home to tenants around 2017), and Palliser Towers, which could be ready around 2016.
Calgary surpassed Montreal in the first quarter of this year for total Class A office space, Mr. Bergevin said. And, across all classes, there is now 2.5 million square feet of office space under construction or about to break ground, and another 3.5 million proposed in the central area of Calgary, he added.
"In a market that moves in enormous blocks, that's not as daunting as it sounds."
Niall Collins, senior vice-president of development for Cadillac Fairview, said that even though some players are putting space up for sublet, other large energy firms are expanding.
"We're continuing to negotiate, we've got a couple of leases that we're negotiating right now," said Mr. Collins, referring to tenants for Cadillac's City Centre project.
Located at 2nd Street and 3rd Avenue SW, the City Centre mixed-use project will cover a full city block and include a 36-storey office tower that's now under construction with occupancy expected in early 2016. Seventeen per cent of the building is leased, and Mr. Collins said negotiations are under way for a "substantial portion" of the remainder.
Last September, when the market was still firing on all cylinders and had quickly become one of the most expensive in the country, Imperial Oil Ltd. said it would relocate its downtown offices to a complex in the southeast end of the city, and months later Canadian Pacific Railway Ltd. said it would move some of its head office to property it owns in the city's Ogden rail yards.
With vacancy rates still low, prices remain solid.
"Imperial is moving out of town, but you've got a lot of larger companies that are eating up every square foot of space that becomes available," Mr. Collins said. "So the exit of CP and Imperial, I don't think it's leaving a void that will take long to fill."
"The lack of activity that we're seeing today is in my estimation in large part due to the lack of available space, or lack of available quality space," said Loy Sullivan, a vice-president at 20 Vic Management Inc., whose firm was involved in the leasing of Eighth Avenue Place West, which is scheduled to be ready for tenant fixturing in the first half of next year. "The bigger transactions, there's just nowhere for them to take place."
It will be some time yet before the projects under construction come on stream.
"In my view demand is just moderating," said David Routledge, vice-president of real estate management west at Oxford Properties Group, which announced this month that MEG Energy Corp. will occupy about 11 floors of its 25-storey Eau Claire Tower once it's built.
Mr. Routledge noted that MEG's growth is organic. "It's 300,000 feet of growth of that tenancy, so our view for 2013 would be that we're in for a period of more moderate growth but we do see a good outlook going forward."
Mr. Routledge added that many of Calgary's large firms are now larger and better capitalized, as are its landlords, which creates stability and moderates the boom-bust cycles of the past. The last major round of development came as a result of the high oil and gas prices that existed prior to the financial crisis.
"As of right now, demand is maybe a little bit sluggish," said Andrew MacLachlan, a broker and executive vice-president at Jones Lang LaSalle Real Estate Services Inc., "most groups are taking a wait-and-see approach." But, he adds, "it's wait-and-see, but that's at the top of the market."
Jones Lang LaSalle publishes a property clock where 12:00 means the market's peaked and 6:00 means it's bottomed. Calgary's been hovering around 12:00 for more than three years now. Most of the local players suggest it will continue to do so for some time to come.
Vacancy rate in Calgary
As it stands, Calgary is the tightest major market in Canada.
3.8%
The current vacancy rate for all classes of buildings in downtown Calgary, compared with 7 per cent in Edmonton, 4.9 per cent in Vancouver, 4.6 per cent in Toronto and 6.6 per cent in Montreal.
3.3%
Calgary's office vacancy rate in the fourth quarter of last year. Even in a pessimistic scenario that takes into account new buildings coming on stream, Cushman & Wakefield Canada CEO Pierre Bergevin said that he doesn't see it going much higher than 5 per cent.