Canada's Real Estate Bubble Turns Bust
A report from the Financial Post shows that Calgary in Alberta Canada now has 1.7 million square feet of empty office space, the most in North America with another 5.2 million under construction! After years of booming construction, the natural resource rich country is starting to feel the pinch.
CALGARY – The number of half-empty office buildings in Alberta is projected to spike, as Colliers International predicts an “ill-timed” building boom should push up vacancy rates in Calgary and Edmonton.
In a report released Tuesday, the real-estate brokerage’s chief economist Andrew Nelson said, “the fall in oil prices has had a negative impact on the energy-reliant markets (in Western Canada),” which has contributed to rising vacancy rates and falling rental prices in Alberta’s two largest cities.
Vacancy rates jumped over the course of the second quarter. In Calgary’s case, Colliers reported the downtown vacancy rate rose to 13 per cent from 10 per cent, while Edmonton’s vacancy rate increased to 11.2 per cent from 10.6 per cent.
A glut of new buildings under construction in both cities could push those numbers up even higher.
“Canada is also in the midst of an ill-timed supply surge that caused vacancy rates to rise even in markets with positive absorption in (the second quarter),” the report noted.
There are 5.2 million square feet of office space under construction in Calgary right now, which is the largest amount of new commercial space being built in any city in Canada and could further push up vacancy rates.
Edmonton, a city with a current total of 17 million square feet of office space, is in the middle of its own building boom with over 2 million square feet of space under construction.
But here comes the silver lining!
Some observers see at least a partial silver lining in the numbers.
In recent years, Calgary Chamber of Commerce director of policy and research Justin Smith said, commercial real estate costs downtown Calgary were “going through the roof” and “accelerating at a pace far beyond the Canadian average.”
He said those escalating costs made it difficult for some companies to stay in downtown Calgary and noted that even large companies like Imperial Oil Ltd. and CP Rail Ltd. moved their head offices to the suburbs.
The uptick in vacancy rates, he said, could provide some relief to smaller companies looking to do business downtown, as rental rates are projected to fall as vacancies rise.
However, the numbers in Calgary may understate how much office space is sitting empty as a result of a phenomenon called ghost vacancies, where companies that have cut staff hold onto more office space than they need.
Colliers executive vice-president and partner Jim Rea said that ghost vacancies mean that, even if employment levels rise, vacancy rates may hold steady.
“The ghost space may never come to market, but those companies that currently have excess capacity of office space, as they continue to staff up, you can’t assume that they’ll be back in the market looking for more space,” Rea said.
Weakening demand for office space in both Calgary and Edmonton has resulted in large quantities of commercial real estate coming back on the market this year.
The report showed that 1.7 million square feet of office space has become available in Calgary’s downtown core, thanks in part to thousands of layoffs in the oil patch and a decline in the need for commercial space.
That is the largest quantity of newly empty space in any downtown in North America, including Houston, an oil and gas town where 1.6 million square feet have become available this year.