Varcoe: Downtown office slide moves in right direction with 'baby steps,' but empty buildings still a challenge

Slightly more than 200,000 square feet of downtown office space was absorbed in the final three months of 2023.

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The long march to fill the vacant office towers in downtown Calgary continues with “baby steps” being taken on a prolonged trek.

Yet, things are moving in the right direction.

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The vacancy rate for downtown office buildings dropped to 30.2 per cent by the end of last year, new data by commercial real estate firm CBRE shows.

That’s down from 30.9 per cent recorded during the July-to-September period. It also marks the sixth consecutive quarter of improvement.

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Slightly more than 200,000 square feet of downtown office space was absorbed in the final three months of last year, reflecting more spots being leased than added to the overall market.

“The baby steps that we’re taking are just a sign of the overall economy recovering, which is good, as opposed to three quarters of negative (change) and then one major jump,” Greg Kwong, regional managing director for CBRE in Calgary, said Friday.

Throughout the year, 414,000 square feet of office space was absorbed.

There’s a long way to go before the collection of office buildings situated south of the Bow River become as full as they were a decade ago, before oil prices crashed and the rate was still in single digits.

Since the end of the first year of the pandemic, the vacancy level has remained stubbornly above the 30 per cent mark

After reaching an all-time high of 33.7 per cent in the spring of 2022 — and with thousands of people working remotely — the figure has declined with the economic recovery and the start of a program to convert aging office buildings into residences.

“It has come down. But property values, people’s actions and optimism are no different whether it’s 32.8 or 30 per cent — it’s just high still,” added Kwong.

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“The disease has been identified and remedies are starting to be thrown at that disease, but we’re still not cured.”

Downtown office assessment

That view is backed up by new assessment data released by the city this week.

The annual process, which reflects property values as of July 1, shows downtown office buildings essentially remained flat for 2024 after increasing slightly the previous year, now sitting at a combined value of $8.16 billion.

The iconic Bow office tower inched up in assessed value by one per cent to $753 million.

Both Brookfield Place and Bankers Hall increased in value by three per cent, while Centennial Place dipped six per cent.

However, the entire downtown office sector has seen total assessments erode by two-thirds since 2015. And the tax take from such accounts has fallen to $172 million from $316 million in seven years.

Today, several factors are helping the downtown, including the broader recovery in the Alberta economy, more people returning to work in offices, the emergence of new tech firms in the core and a city grant program designed to entice developers to convert aging offices into residential units.

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“We are definitely making progress and we’re well on our way to having a more normalized market reality,” says Opus Corp. CEO Hannes Kovac, who is also co-chair of the real estate sector advisory committee at Calgary Economic Development.

There are also smaller signals that highlight the improvement.

The annual pedestrian traffic counts on Stephen Avenue topped four million last year for the first time since the pandemic, up 27 per cent from levels seen in 2022, according to data from the Calgary Downtown Association.

“We are starting to see this upward trajectory now of people being back downtown,” said Mark Garner, association executive director.

Stephen Avenue downtown Calgary
Pedestrians walk on Stephen Avenue Mall in downtown Calgary on Friday, September 29, 2023. Gavin Young/Postmedia

While a 30 per cent downtown office vacancy rate is still the highest among the country’s largest cities, it is falling.

“Think of the knockout punches that downtown Calgary has had, with the downturn of oil and gas and then COVID,” Garner said.

“We are trending in the right direction.”

Part of the city’s long-term challenge is that the office sector was overbuilt during the boom days, with new towers going up while many older Class B and C buildings remained on the scene as the market slowed.

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During the fourth quarter, the vacancy rate in Class B and C buildings sat at 42 per cent, compared with 15.6 per cent for newer AA class offices.

“What we’re starting to see is a stabilization of the viable office inventory within our downtown,” Thom Mahler, the director of downtown strategy at the city, said in an interview.

“It’s a very good sign that vacancy rates are starting to come down. Even more important than the actual vacancy rate is the positive absorption. That means people are occupying vacant space within the core.”

Calgary’s downtown revitalization strategy is also continuing, with plans to convert vacant and aging office buildings into residences, spurred by incentives.

So far, 13 projects have been approved — reflecting a city investment of just over $120 million — and another four proposals are under review.

If all 17 developments proceed, it would transform about 2.3 million square feet of office space into housing, adding more than 2,300 units to the downtown.

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It will take a lot more private-sector investment for the downtown transition to shift into another gear.

Higher interest rates and a slowing national economy remain potential risks in 2024. Mergers and acquisitions in the Canadian oilpatch are continuing.

Improvements in the market during the final three months of the year came from a handful of smaller deals, not one major transaction.

At this point, a similar outlook is in place for 2024.

“We expect a lot of leasing activity,” Kwong said.

“Do we see more positive absorption? Absolutely, but baby steps like we’ve seen over the last five quarters.”

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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