Speculative construction boosts Calgary office vacancy

Speculative new construction will boost Calgary office vacancy dramatically in the next two or three years.
According to Avison Young's National Fall/Winter Newsletter released Tuesday, about 6.3 million square feet (msf) will be added to the city’s office space inventory, an increase of 11 per cent, but only two-thirds of the space has been leased, with 2.3 msf not yet spoken for.
"Over the next two or three years, speculative new construction will be one of the biggest issues facing the Calgary office leasing market," states the report.
Avison Young, Canada's largest independently-owned real estate firm, is projecting that vacancy could reach as high as 16% (18.3% including sublease space) by spring of 2012. That would be the highest Calgary vacancy mark since the controversial National Energy Plan and the collapse of world oil prices decimated the city's economy in the early 1980s.
"Global market conditions, which combined to cause the current level of vacancy, will continue to affect the market as long as the world remains in recession," says the report. "The rapid economic downturn has resulted in corporate downsizing, merger and acquisition activity, reduced growth plans, and low oil and gas prices. All of these factors have resulted in more space being returned to the market as either head lease or sublease space, growth into new space being halted, and negative absorption being recorded for the first time in six years. Many businesses are also postponing decisions on their office space needs until the last moment as they attempt to capitalize on softening lease rates."
Once occupancy does begin to occur, says the report, both the vacancy created by new construction and any resulting backfill space will add to the existing vacancy and impact the market heavily. Vacancy is expect to remain high until job creation, corporate growth and commodity prices rise.
But there is a silver lining to the situation. As vacancy climbs, asking rents will drop.
"As vacancy increases due to a slower economy and new construction being completed, Calgary landlords will face some difficult issues," says the report.

To check out details on Calgary and the other Canadian markets in the newsletter, go to www.avisonyoung.com