In Calgary, an epic real estate glut compounds the misery of a pandemic and oil crash – Financial Post

From the outside, the roughly diamond-shaped Nexen tower is one of the more recognizable features of Calgary’s skyline. On the inside, it’s a barren landscape. All 37 floors are empty.

Office landlords in major cities around the world are facing a hit from the coronavirus. In Canada’s energy capital, they’re suffering from a triple dose of misery: the pandemic, an oil crash and a severe hangover from a building spree.

More than 20 per cent of office space is vacant, and one firm projects more than 33 per cent of downtown will be open by early 2021, creating a cycle of falling rents, declining values and “a huge crater” in local government finances.

It’s a cruel twist for a once-thriving city that has more corporate head offices than any other in Canada’s west, where downtown space was nearly impossible to get during last decade’s energy boom. The tight market then, and the oil market’s quick rebound from the 2008 financial crisis, spurred a wave of development that expanded downtown office space by millions of square feet.

Now there’s an epic glut. Net asking rents — what the landlord receives — for high-quality office space have fallen to less than $15 (about US$10.60) per square foot, according to data from Altus Group Ltd. That’s less than half the cost in Vancouver and Toronto, two of North America’s tightest office markets, says Ray Wong, vice president of data operations at Altus.

Boom, Bust, Bust

Four buildings are already completely empty, with the Nexen tower, at 600,000 square feet, being the largest after China’s CNOOC Ltd. moved its diminished staff in the city to a new location. And new buildings, such as the two-tower Brookfield Place development that opened three years ago, are still being absorbed by the market.

“The office market is more than likely going to see vacancy increase, probably substantially,” said Todd Throndson, Calgary managing director for Avison Young.

Canada’s oil companies have been hit uniquely hard by the prolonged period of lower prices that started in 2014. The industry is dependent on the higher-cost oilsands, and in recent years those firms have focused on trimming head-office staff to cut expenses and become more competitive with cheaper U.S. shale production.

The industry also has been suffering from a lack of pipeline capacity that has made it harder to get its crude to U.S. refineries, weighing on local oil prices and restraining producers’ ability to grow.

There was the Calgary that everyone was used to: boom, bust, boom. Whereas now, it’s been bust for a long time

“There was the Calgary that everyone was used to: boom, bust, boom,” said Roelof Van Dijk, CoStar’s director of market analytics for Canada. “Whereas now, it’s been bust for a long time.” His firm sees the city’s downtown office availability rate rising to 33.1 per cent by the first quarter of next year, exceeding vacancies in other energy-driven cities such as Houston and Dallas.

“It’s going to hurt assessment values and the taxes that they’re paying on these properties. That creates a huge crater in city finances,” Van Dijk said.

The crisis has already claimed a major victim in property developer Strategic Group, which put a chunk of its commercial real estate portfolio into creditor protection last year. The firm said that since mid-2014, 78 tenants occupying almost 575,000 square feet of space either didn’t survive or deserted their leased space.

Unemployment Rising

The crisis has rippled throughout the city, hitting both business owners and residents. The decline in downtown property values hurt other businesses by shifting about $250 million in property taxes to other non-residential properties from 2015 to 2018. To ease the burden on companies, the city last year raised residential property taxes.

Those increases are coming at a difficult time for residents, many of whom lost their jobs during the oil downturn. Calgary’s unemployment rate was 8.6 per cent last month and is sure to spike higher. Alberta Premier Jason Kenney has raised the spectre of 25 per cent unemployment for the province.

Those figures all are threatening to worsen in the months ahead after oil’s shocking collapse. Western Canadian Select, the benchmark grade produced by the oilsands, has traded below US$4 a barrel this month, far below the levels Calgary’s oil companies need to be profitable. Kenney has said the industry can expect at least 18 months of depressed prices. That will likely mean more job cuts and more empty space.

Landlords and tenants will need to work together to weather the crisis ahead, Throndson said. Already he knows of one landlord that is allowing its tenants to pay only operating costs and taxes while skipping net rent for a while. Another went to its bankers early on in the crisis and worked out a deal to only pay interest costs on its debt for the rest of the year, he said.

Over the longer term, to rescue its office market, Calgary will need some larger change in its economic course, whether that’s an influx of technology companies or a rebound in the oil industry caused by a federal commitment to a national pipeline, Throndson said.

For CoStar’s Van Dijk, diversifying the economy will be key. Many oil-market analysts are projecting demand will peak in the 10 to 20 years ahead, and Canadian oil, which is typically costlier to produce, process and ship to market, may not fare well in that environment, he said.

“The question is, ‘Is this the industry that you want driving the economy?’” Van Dijk said. “Whether it’s 10 years, 20 years, 50 years down the road, eventually that gravy train is going to dry up.”

Bloomberg.com