The last thing Calgary’s battered commercial real estate market needed was a breakdown at a major landlord.
Thanks to the oil crash, and the exodus of numerous energy companies, the skyline already had lots of empty space. The downtown office-vacancy rate has been close to 30 per cent for the past three years, or roughly 15 times higher than Toronto and Vancouver.
Now, dozens of office buildings owned by Strategic Group Inc. are in limbo, and may go up for sale, after a judge placed them into receivership in December.
Led by developer Riaz Mamdani, Strategic had sought court protection so it could restructure 56 of its Alberta properties, 46 of them in Calgary. It planned to sell some of the real estate, and turn some office buildings into other uses such as residences, retail and storage.
No decision has been made about the future of the properties, according to the latest document on the receiver’s website. The receiver, Alvarez & Marsal Canada Inc., did not respond to a question about whether all the properties would be sold.
Strategic’s court filings are a window into the dire state of the Calgary market. The filings show a number of completely vacant properties, some partly leased and others fully occupied. Last year, Strategic said 21 tenants left its buildings, including Boston Pizza, Starbucks and Five Guys, according to the documents.
Mr. Mamdani said in some cases, properties were not generating enough revenue to pay taxes and mortgage payments and, in other situations, the revenue was not enough to cover the operating costs, much less debt obligations.
During the beginning of the oil downturn, a number of skyscrapers were being developed by Canadian pension funds, Brookfield Properties, Manulife Financial and other real estate companies. That flooded the market with office supply when businesses were slashing jobs and using less space. Since the oil crash, six new office towers have opened, adding 4.6-million square feet, a 10-per-cent gain, to the city.
In the fall, Encana Corp. announced that it would relocate its Calgary headquarters to the United States and rebrand as Ovintiv Inc. Recently, Husky Energy Inc. and Perpetual Energy Inc. have slashed jobs, adding to the tens of thousands of energy jobs that have disappeared since the 2014 crash in the oil price.
“A lot of people think the high vacancy rate is because a lot of people got laid off. No. It is a combination of that and all that new supply coming to the market," said Greg Kwong, Alberta regional managing director for commercial realtor CBRE.
The new buildings, such as Brookfield Place East, Eau Claire Tower and Telus Sky, pulled tenants away from older, lower-quality buildings also known in the real estate industry as class B buildings. Those class B buildings, which are typically located in less desirable locations, have a much higher vacancy rate than the state-of-the-art buildings known as class A or class AA.
“That is human nature, where we all want the nice shiny thing. Why take a class B building when you can get a class A or class AA,” said Summer Newman, research manager with commercial realtor Cushman & Wakefield.
From 2014, through the end of last year, the vacancy rate for class B buildings in downtown Calgary rose to 39 per cent from 14 per cent, according to CBRE. Most of Strategic’s office buildings are considered class B or lower, according to a company spokesperson. But even though tenants flocked to higher quality buildings, the vacancy rate for them also soared from 2014 to the end of last year. For class A office properties, the rate climbed to 26 per cent from 8 per cent and the rate for class AA jumped to 18 per cent from 4 per cent.
In comparison, the national vacancy is 11 per cent. Toronto and Vancouver are at 2 per cent. Other major Canadian cities such as Montreal and Ottawa are much lower than Calgary.
Ms. Newman says the office market will stabilize because developers have stopped building skyscrapers, and believes there is some interest from non-oil and gas businesses. The city recently established a $100-million fund to help attract investments and develop new jobs.
CBRE’s Mr. Kwong said even though the newer buildings had a higher occupancy rate, that does not mean they are in a better position than the older buildings.
“If you just spent all this money on a brand-new building and you get 70 or 80 per cent leased but the rates are 20 per cent less than what you projected you would get … You have invested hundreds of millions of dollars and not getting the return,” he said. “Everybody is getting hit hard,” he said.
Gross rent in 2013 was $47.42 per square foot, according to Cushman & Wakefield. Last year, gross rent was $33.45 per square foot.
Strategic’s court filings show a long list of creditors, including the city of Calgary. Among those with the most exposure are Telus Corp.'s pension plan, which co-owns 95 buildings with Strategic of which 25 are under receivership. As well, ICI Mortgage Fund is one of Strategic’s largest loan providers and is owed $115-million, according to court filings.
A spokesperson for the city of Calgary said it was too early to determine how Strategic Group’s situation will affect the city.
CBRE’s Mr. Kwong does not expect the receiver to dump Strategic’s 56 properties in the market in a fire sale, which would further depress the market. He said the properties will likely be sold in a methodical manner designed to generate the highest price. However, insolvent businesses do not bode well for the economy. Even if the sale takes years, the value of commercial real estate has plummeted.
In December, 2018, the Sun Life Plaza sold for $213 per square foot. In 2012, a similar building class, the Standard Life Tower, sold for $410 per square foot, according to CBRE data.
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