What’s Coming Unglued Now in Canada?

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Canada lumbered through the first half of 2015 in a “technical recession,” Statistics Canada confirmed this week, as GDP shrank in both quarters. Among the culprits: the swooning energy sector and an investment slump.

Now everybody is lining up behind the hope that a sudden acceleration will put the economy back on track in the third quarter, despite oil that has re-crashed and despite the ongoing collapse – and that’s what it is – of the all-important energy sector.

To get to this acceleration, the once booming residential and commercial construction sectors have to hold up, or else Canada’s economy is in real trouble. Alas….

“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, warns a new report by commercial real estate firm Colliers International cited by the Financial Post. It paints a picture of an epic office boom turned into an even more epic office glut, particularly in Calgary and Edmonton, Alberta, the epicenter of Canada’s oil patch.

This office glut comes on top of Calgary’s housing meltdown. For the first eight months, total home sales in Calgary plunged 25%, according to the Calgary Real Estate Board. Condo sales collapsed 39% in August and 30% year-to-date. Inventory sits a lot longer on the market before it sells, if it sells. And pressures are building on prices: the average condo price was down over 10% in August from a year ago.

Commercial real estate is heading in a similar direction. Only worse. Calgary was a boom town. Office towers have been sprouting like mushrooms. In recent years, commercial real estate costs downtown were “going through the roof” and “accelerating at a pace far beyond the Canadian average,” Calgary Chamber of Commerce director of policy and research Justin Smith told the Financial Post. But it takes years to plan and build office towers, and now no one can just turn off the flow.

With 5.2 million sq. ft. of office space under construction, Calgary ranks eighth in North America and first in Canada, ahead of mega-city Toronto with 4.8 million sq. ft. Houston, the epicenter of the US energy boom and bust, crowns the list with 12.3 million sq. ft.

In downtown Calgary alone, there are 3.4 million sq. ft. of office space under construction, almost as much as in downtown Toronto (3.8 million sq. ft.) and 28% of the 12.3 million sq. ft. under construction in downtowns across Canada!

In relationship to the size of the market, Calgary ranked third in North America, with office space under construction amounting to 7.8% of existing inventory.

It’s behind only Silicon-Valley boom-and-bust-town San Jose, whose 7.8 million sq. ft. under construction amount to a breath-taking 10.1% of existing inventory, and Edmonton, the capital of Alberta, whose 2.2 million sq. ft. under construction amount to 8.3% of existing inventory.

“With seven new office towers under development and coming to the market between now and 2018, it is no surprise that Calgary is leading the way in new construction in North America,” Joe Binfet, managing director at Colliers International in Calgary, told the Calgary Herald. “The new developments will add an additional 12% of new inventory to the downtown market.”

“Add to this the new developments in the suburban, retail and industrial markets and it is clear Calgary would be among the top cities in terms of new construction,” he said. The report explained it this way: “The new construction speaks to the long-term vision developers have for the city and the confidence they have in Calgary going forward.”

That vision was perhaps a tad grandiose. Now companies are cutting back on costs and capital expenditures to preserve precious capital, they’re scaling back operations, laying off employees – ConocoPhillips, Nexen, and Talisman recently announced layoffs in Calgary – and reducing or eliminating hours for their contractors. They’re shrinking their footprint.

Companies gave up 1.7 million sq. ft. of downtown office space, the largest quantity of newly vacant office space in any downtown in North America, beating even Houston, where 1.6 million sq. ft. have become available.

So the vacancy rate in Calgary soared to 13% in the second quarter, from 10.6% in the first quarter, according to Colliers International. In Edmonton, it jumped to 11.2%.

“The number of half-empty office buildings in Alberta is projected to spike,” according to the Financial Post.

Tom Dixon, manager of real estate, transportation, and logistics with Calgary Economic Development, remains (sort of) upbeat:

“The best test is have you seen any cranes stop? Have you seen any being disassembled and projects capped? We’ve seen that in other situations. I haven’t seen any this time,” he told the Calgary Herald. “I think the commitments are strong, firm, and people are moving ahead based on the fact that once you start construction it makes sense to just complete it. Who knows? When each of those buildings is completed, maybe oil is back at $60, $80, or $100. We don’t know.”

They’re all waiting for the deus ex machina, the next oil boom.

But as terrible as these vacancy rates are – and they’re bound to get much worse – they understate the problem. As a company sheds employees and contractors, it might nevertheless hang on to the thinly staffed or vacant space. These “ghost vacancies” don’t enter into the official vacancy rates.

“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,” Colliers executive VP and partner Jim Rea told the Financial Post. And so even when the slump ends, and employment rises again, it might not reduce the vacancy rates for years to come since companies will first fill the empty offices they already have.

This is how an epic office construction boom – not just in Alberta but in much of Canada and the US – boosts the economy for years only to run afoul of the eventual business cycle or, as is the case in the oil patch and Silicon Valley, the boom-and-bust cycle.

Businesses get “crunched” in the Canada’s oil patch, consumers lose it, and indexes hit Financial Crisis levels. Read… It Gets Even Uglier In Canada

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  15 comments for “What’s Coming Unglued Now in Canada?

  1. Petunia
    Sep 4, 2015 at 11:57 am

    I’m from New York so these numbers seem small to me. Even in Florida an average business park is probably at least 500K sf. Are the business centers in Canada really that small?

    • Sep 4, 2015 at 12:12 pm

      Petunia, I think you misread the numbers. Calgary (not a huge city) has more newly-vacant office space than any city in the US: 1.7 million sq. ft. of newly-vacant space. This is not total office space, but newly-vacant space. Nothing in Florida comes even close. It’s more than Houston has, which is number one in the US in that category.

      And 5.2 million (million not “K”) sq. ft. of office space under construction is huge too, 8th in North America.

      Those “500K sf” office parks you mentioned – you’d have to have over 10 of them under construction at the same time in the same town to equate the 5.2 million sq. ft. under construction in Calgary.

  2. rich black
    Sep 4, 2015 at 12:32 pm

    Nice catch, Wolf. I haven’t seen anybody covering this story. It reminds me of Denver in late 1980, when there was an energy boom and penny stock boom. Cranes were everywhere, people with money were wearing cowboy hats and boots and were driving around in MB 450SLs. By 1982, those empty newly built Denver highrises stood empty, dark and looked ghostly at night.

    • CrazyCooter
      Sep 4, 2015 at 10:30 pm

      They must be short! I haven’t ever fit in a sedan with my hat (only wear what was given to me by my father – I have two). Hell, I had a 300c for a while when I was still living in TX and even without a hat my hair was all on the roof – one of my only complaints (2007). I gotta have a full size rig to wear the hat in the cab. Don’t even work in my wife’s 2002 Ranger.

      Regards,

      Cooter

  3. michael
    Sep 4, 2015 at 1:36 pm

    Its fascinating here in the bay area, there a dizzying number ofempty office buildings yet they are building many more in the nerve centers of Santa Clara. This bust is going to be epic.

  4. Paulo
    Sep 4, 2015 at 2:53 pm

    Article nailed it. If financing is secure buildings will be finished. However, if things get worse construction will stop.

    It is similar to hedged tight oil projects. Hedged they will continue to pump because their losses are not as big as they would be otherwise. If Hedging runs out and prices stay low, there won’t be any new wells.

    In a nearby town close to where I live a WalMart super centre helped kill off a shopping mall. The mall scaled back and kept a few stores, then repurposed the entire property to covered storage for RVs and boats, etc. You wouldn’t even know stores ever existed or the place was once a shopping mall.

    Can’t do that with an office tower, though. And empty buildings are neglected buildings. Neglected buildings grow tired and start to fall apart. Buildings get taken down everyday, look at Los Vegas.

    Never say never.

  5. mick
    Sep 4, 2015 at 7:36 pm

    I live in Vancouver, and the story is VERY similar. Vacancies well into double digits and buildings going up everywhere. What are these people smoking?

    Anyway, I have friends in Calgary who tell me you can get “C class” space for the cost of overhead. That is to say, zero rent, just pay the utilities, taxes, etc.

    That’s how desperate landlords are.

  6. RDE
    Sep 4, 2015 at 9:05 pm

    In China they evidently have a much better approach to construction during boom times. Leave out the re-bar and structural steel, and as per standard practice leave the interior completely unfinished and void of electricity or plumbing. Instead of spending money constructing a building that will never be used, send the money saved to Switzerland where the #1 son can put it to use buying derivatives .

    When the building reaches the end of it’s life cycle in a couple of years it will take less dynamite to implode it. More rational on all counts.

  7. Mark Mills
    Sep 4, 2015 at 9:31 pm

    I live in Calgary and Wolf is 100% correct. There are huge office and condo towers going up all over the downtown. Thousands of units will be coming online in the next 6 months. Meanwhile, layoffs continue (1000 more publicly announced this week). But there is also a strong denial of reality here. Real estate prices are not budging one inch, and amazingly enough, people are still buying. Many people are of the opinion that the “rebound” is right around the corner.

    I even heard an ad on the radio telling people that can no longer afford their homes to have a property management company rent it out instead of selling until the downturn is over and house prices start going up again – because everyone knows, house prices only ever go up. I personally think that ZIRP is to blame for this madness.

    • Jack
      Sep 5, 2015 at 8:50 am

      Mark,
      I’m sure the newly elected provincial NDP government will just hire more public servants, run up the debt the way they have in Ontario and everything will be fine until the next prov. election. The prov. debt will go through the roof but they won’t be around to deal with it.

  8. Ryan Kelly
    Sep 5, 2015 at 4:48 am

    I don’t have any figures to back this up, but it seems that construction on the campuses of American universities is sky rocketing as well. While is it different from commercial real estate in that it will be 100% occupied, it is also fueled by a huge boom in debt. The difference is that this bubble is being built on the back of students and graduates with an average of $30,000 in debt at graduation. What happens when university enrollment drops and the amount of capital coming from student debt drops like a rock?

  9. Tony
    Sep 5, 2015 at 5:59 pm

    Hi Wolf. Your twin-planet friend in Edmonton here.
    Great article!

    Sometimes you just need to brush up on your simple math to see a simple solution to a variety of complex problems. In this case, 1+1+1= Infinity

    1. “Canada” want’s to take in tens of thousands of refugees who are fleeing the US-created Utopias in Syria, Iraq, Afghanistan, Libya, Somalia, Yemen, etc.

    1. Calgary is going to have a lot of empty office space.

    1. Desperate refugees will need a place (some space!) in which to live, “somewhere” in Canada.

    1+1+1 = Harpolini Heaven in Calgary and Edmonton!

    Pulling this off will create yet another “Alberta Advantage”. Because CHEAPER, even more desperate labor will be coming down the pipeline, Harper & Co. can now tell all of Alberta’s TFWs that they are no longer needed and to head home to the Philippines, Mexico, etc.

    Not only that, but if I could get the deep snow on my huge driveway shoveled off for $1, that would be less expensive than the cost of the gasoline required by our self-propelled, 12-horsepower snowblower. I’d save a fair bit of money, while the lucky person breaking his/her back shoveling our driveway would take home quite a windfall — a real “free”-market “win win” situation for both of us.

  10. margsview
    Sep 6, 2015 at 1:43 am

    i would be curious to know how this sharp long term down trend will affect pulp and paper mills in B.C.? I am asking this because some towns are totally dependent on singular resource industries like this. As well, many forget that retired pensioners may have a false sense of security, believing that such a down turn could not last long enough, to jeopardize lifetime pensions. Comment please. Thank you.

  11. Noni Mausa
    Sep 8, 2015 at 7:35 pm

    I had a term position in Edmonton about eight years ago, and was there several months living with friends before I could find a rental. Meanwhile, apartment blocks were converting wholesale to condos, with those units selling before the conversions were complete and, they tell me, often left empty as investments, thereafter.

    Their conservative government, so far as I could tell, didn’t think this was a problem. To a lesser degree than in the US, the builders and investors seemed to think that big oil would never stop gushing. But now, with international supplies unhindered and an increasing number of alternate energy sources coming over the horizon like rather cheerful locusts, the big two Alberta cities might do well to consider repurposing some of this space as Tony proposed above.

  12. Bill
    Sep 13, 2015 at 9:36 pm

    Gee, we cant see this coming? Ask any real estate professional in the San Francisco Bay Area what they think the future holds they will tell you tales of home prices going up another 100 percent by 2018, or if prices level off that the market is “stabilizing, or if the home prices fall it because its not the right “season”. Why would they lie/fib and BS like this? Simple, they depend on a strong real estate market to make a living and would sell their own mother a house even if they new the market was about to crash, right? I’m willing to bet these same realtors would NEVER buy a house during one of these bubbles (unless they thought they could sell it for more before the bubble bursts…)
    Anyway, the housing bubble is a doozie in the bay area and it’s gonna bust soon, in fact, in Marin I have noticed stagnation and price drops…

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