Calgary downtown vacancies drop to 27%

A new report from commercial real estate broker Avison Young shows the worstof Calgary's empty downtown core may be behind us.

The latest fourth quarter 2022 office vacancy numbers sat at 27.2 per cent down 2.5 percentage points from the fourth quarter of 2021.

Adam Hayes, a principal of occupier services atAvison Young, says the improvements come from momentum built in 2021 along with a return to work in the second year of the pandemic.

"Combine that with a much more healthy commodity cycle in Calgary, leading to some mergers and acquisitions, some job growth, and the green shoots of the tech industry, overall, it was a really positive year for Calgary," he said.

City-wide, office vacancies were at 23.8 per cent,down 2.2 per cent from the fourth quarter of 2021. Suburban office space recorded its seventh-straight quarterof positive activity, driven mainly bythe healthcare, engineering and energy sectors.

The flight to quality

The report also says leasing costs continue to increase with inflation as office tenants scoop up the most highly valued commercial real estate in the city in what Hayes calls a "flight to quality."

"So you see people moving to better quality productto try and win the war for talent, attract their employees back," Hayes said. "And in good markets and bad markets, it's becoming pretty apparent that people like nice real estate."

The vacancy ratefor class AA real estate considered the highest quality wasat 14.8 percent, which Hayes says will drive rental rates up in the coming year.

Terry Wong, the city councillor for the downtown core, says that it's a positive sign that office vacancies are finally coming down.

"Calgary's economy is returning, concerns about the pandemic are easing, and it'srecognition that we need to get back to work in the downtown core," he said.

Still, there are parts of the city's downtown that are very empty.The report showslower quality properties are still in the 30 or even 40 per cent vacancy range.

Hayes says the city saw over 500,000 square feet of office space be taken out of the market as the city works to convertbuildings in the core into housing through theDowntown Calgary Development Incentive Program. This works out to about 1 per cent off the vacancy rate.

"I think it's a really positive movement, especially when you look at some buildings that are functionally obsolete because they're old, or the location doesn't have a lure with regards to office tenants," he said.

The report also states upgrades to offices will be a big driver in 2023 as employers add amenities to attract and retain staff.

The next steps

With the lower end commercial real estate sitting empty, many have floated the idea of bringing one of Calgary's post secondary institutions downtown to fill one of the nearly empty towers.

"We need to address the construction cost of new buildings on campus versus the office to post-secondary conversion cost of a downtown office building, which is more economical. The province should be engaged in this discussion as they fund the construction of post-secondary university construction," Wong said.

Moving into 2023, the clouds of a worsening economy linger butthe Calgary economy and commercial real estate market will continue to bring investment,the report states.

"I can tell you, it's really refreshing to be able to say that after the beating Calvary has taken sort of over the last seven or eight years," Hayes said.