Cracks are emerging in Calgary’s once red-hot market for commercial and residential real estate, adding to fears that rapidly sinking oil prices will trigger a broad slowdown beyond the energy sector.
After years of riding high, home sales in the southern Alberta city dropped 7.5 per cent in December from a year earlier, while new listings surged 42 per cent - the first sign of a potentially weaker market in 2015, according the Calgary real estate board. At the same time, lease rates at downtown office towers are falling and some of city’s marquee buildings are grappling with an unfamiliar problem: empty space.
A spike in commercial vacancies and the cooling residential housing market are symptoms of oil’s collapse in a province economists now expect will lag Ontario and British Columbia in growth as the impact of weak energy prices spreads.
West Texas intermediate crude has dropped more than 50 per cent since June amid a supply glut and lacklustre demand, threatening energy-sector profits and forcing deep cuts to spending plans and investor dividends.
The oil rout has also led to an outflow from top-tier commercial office towers, pushing the overall vacancy rate in Calgary’s downtown to 8.52 per cent at the end of last year. That’s up from 7.7 per cent in the third quarter and 7.27 per cent in the same period a year ago, according to Colliers International.
“If companies have a high debt-to-cash flow ratio, they are cutting costs everywhere, and office space is one of the first areas they would look at,” Joe Binfet, Calgary-based managing director and broker at Colliers, said in an interview.
In the fourth quarter, the amount of office space added to the market in downtown Calgary outpaced what new tenants absorbed by 333,000 square feet, according to Colliers.
The bulk of that, just under 197,000 square feet, was in so-called Class AA buildings. The distinction refers to buildings such as Calgary’s Bow tower and newly built Eighth Avenue Place. Vacancy rates in such buildings jumped to about 6 per cent in the period on average, from about 4.7 per cent in the third quarter, Colliers said.
Industry experts are forecasting muted demand in the leasing market as energy prices languish and struggling companies are bought by well-funded rivals. Last year, Spanish oil company Repsol SA announced a $8.3-billion (U.S.) takeover bid for Calgary-based Talisman Energy Inc., kicking off what some energy analysts expect could be a wave of consolidation. Such deals typically lead to a contraction in office space use.
In addition, several new towers at varying stages of construction – including the 56-storey Brookfield Place – will add as much as five million square feet of new inventory to Calgary’s downtown by 2017. That could lead to even higher vacancies, Mr. Binfet said, depending on the duration of the oil-price slump.
“A lot of people are predicting a comeback in oil prices by the second half of 2015, but some people are saying it may last longer,” Mr. Binfet said. “Right now we are seeing people take a step back and evaluate what is happening in the market.”
Slowing sales in the residential market in Calgary have so far not stopped prices from rising. House prices rose 4.5 per cent in December from a year earlier, and could remain firm if crude prices recover.
In the office market, oil’s decline has prompted more energy companies to sublease space, as delays to long-term projects reduce workforce needs.
Companies seeking to sublease space account for more than 45 per cent of current office vacancies, said Greg Kwong, executive vice-president and regional managing director at CBRE Group, Inc. in Calgary.
Whitecap Resources Inc. recently moved in to 100,000 square feet of office space previously used by Pembina Pipeline Corp., according to Colliers. Northern Blizzard Resources acquired 60,000 square feet from Apache Corp.
“It’s a sign of the times,” Mr. Kwong said.
“We’ve lived through booms and busts, but no one has lost the long-term faith in our market. It’s just in the short term there’s going to be a little bit of pain, for sure.”Report Typo/Error