The office vacancy rate in downtown Calgary, the epicenter of the Canadian oil bust, could hit the vertigo-inducing level of 17.5% by the end of 2018, a new report by commercial real-estate firm Colliers International warned. It added ominously: “Given the current global macro environment, this may even be an optimistic forecast.”
While real estate is supposedly local, it’s not. It has been, like so many things, globalized. Colliers:
The geopolitical turmoil in China, Greece, and Iran must be taken into consideration, as the global instability is already affecting local top-level decisions and investor sentiment.
The biggest problems are cropping up in the sublease sector, according to the Calgary Herald, citing Colliers’ report. Sublease availability began to balloon in late 2014. The oil bust was hitting hard. Canada’s tar-sands operations are particularly at risk since they’re the world’s high-cost producers; they’re sitting ducks in an oversupplied market where an all-out fight over market share has broken out.
“International energy companies began reallocating capital to other parts of the world,” according to the report. And local operators, to stay alive a little longer, tried to slash operating expenses and conserve cash where they could. Layoffs and consolidations followed. A lot of people in the oil business are contractors; and their hours were getting cut. And companies began shedding by then useless office space.
But there have been few takers.
By the end of June, available sublease office space in downtown Calgary, after soaring for three quarters in a row, hit an all-time record of 2.6 million square feet. At 52% of all available office lease space, sublease space exceeded headlease space for the first time since Q4 2009, during the Financial Crisis. That’s a bad sign.
In the past, the market has rebounded fairly fast, Colliers explained. For example, the explosion of sublease availability during the Financial Crisis was “panic-driven and a short-term phenomenon,” as the Calgary Herald put it. But this time, it’s different. This time, a tsunami of new construction is adding to the problem.
As new buildings are being completed, “negative absorption” has reached 1.7 million square feet year-to-date. This phenomenon of “negative absorption” hadn’t been part of the rosy forecasts when these buildings were approved. It’s going to get worse: According to Joe Binfet, managing director/broker of Colliers International in Calgary, 3.8 million square feet of new construction is scheduled for completion between 2016 and 2018. These took years to plan, and it’s too late to stop them now. And vacancy rates are expected to skyrocket.
In the second quarter, the overall vacancy rate has jumped to 12.8%, from 10.7% in Q1. A year ago, it was, according to CBRE Canada, 9.1%. Hence Colliers prediction that the vacancy rate could hit 17.5% by year-end 2018, and its warning that “this may even be an optimistic forecast.”
Given this flood of supply and dearth of demand, the Class A rental rate dropped 7% in Q2 from the prior quarter to $26 per square foot.
Susan Thompson, research manager at Calgary Economic Development, explained that the availability of sublease space in downtown Calgary was an indicator of the economy:
“We haven’t seen any kind of turning point yet. Nobody’s 100 percent sure if we’ve made it through the layoffs yet, and it’s going to be heavily-dependent on energy prices, and we don’t think we’ve ridden through all of that yet. So we may still have some ways to go with our current market conditions.”
Now the fear is spreading that the debacle in Calgary and the Canadian oil patch in general will spill over into the broader economy, which is already faced with other problems and risks, including enormous household indebtedness that has funded a countrywide housing bubble of dizzying proportions, particularly in Toronto and Vancouver. If the housing bubble pops, all bets are off.
So the Bank of Canada took a good look at the Canadian economy sinking into the mire, glanced at the collapsed prices of commodities wreaking havoc in Canada, and then looked at the global economy, particularly at China and the US. Read… Bank of Canada Sees Global Economy, Freaks Out, Cuts Rate, Warns of Financial Stability Risks, Loonie Plunges