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Sublease space helps stabilize office rates
Downtown office rental rates in Calgary soared by 160 per cent from 2003 to 2007, but show a slight dip this year as the vacancy rate continues to increase.
A market report by Barclay Street Real Estate Ltd. says the overall average rental rate for office space in downtown Calgary jumped from $15.25 per square foot in 2003 to $39.60 last year. This year it has fallen to $38.20.
The report, by Michelle Pink, the company's research analyst, said increasing vacancy in the upcoming years will not be largely due to new construction but from "typical contraction of businesses and the increasing amount of sublease space."
The vacancy rate bottomed at 0.4 per cent in 2006, rose to 1.9 per cent last year and stands at 4.5 per cent today in the downtown. Vacancy is projected to rise to between 9.6 per cent and 15.3 per cent by 2011, depending on different scenarios involving new development and annual absorption rates. The high end of the range would be the worst-case scenario, if leasing activity stopped and all the buildings that are under construction continued but were not leased. {sidebar id=1}
It will be more than a year before rental rates for downtown office space come down as it will take "outward pressure" from sublease space to make landlords drop prices, said the report.
As well, 44 per cent, or 58 of Calgary's 132 downtown buildings, have changed hands over the last three years, said Nathan Revoal, associate for office leasing with Barclay Street Real Estate Ltd. in Calgary.
"I do not think that net rental rates are necessarily going to hold at today's numbers," he said. "But we feel that there will be an adjustment between the different class buildings and a further adjustment between west-end product and central core buildings.
"Historically, there has been 10 per cent to 15 per cent differential of net rental rates depending on class and recently that has obviously been blurred. When rates initially began to increase, we saw B class product leading the market with increases of net rental rates -- and now we are seeing the same downward adjustment with B class again leading the market.
"With overall vacancy projected to increase over the next two years, landlords will inevitability have to become competitive in the marketplace. The wild card, though, is sublease space."
Average rental rates in 2007 for AA class space were $50 and new developments averaged $40. This year the AA class space is at $48 with new developments at $39. Top-class space in 2003 was an average of $24.
B class space has seen an average office rental rate increase from $11.50 in 2003 to $35 last year. This year it is $34.
A fall 2008 Calgary office market report by Avison Young said vacancy in downtown Calgary continues to rise due to space being left behind by tenants moving into newly constructed buildings. Class B and C buildings are particularly feeling the effects of this with vacancy in these types of buildings climbing much faster than higher-quality buildings.
"With the level of uncertainty in the market, we expect tenants will be aggressive in negotiation for new space and on their renewals," said Todd Throndson, managing partner with Avison Young Commercial Real Estate in Calgary. "We also expect landlords for Class A product to remain relatively set at their current market levels, but do anticipate rents in Class B and C buildings to retreat over the course of the next 12 months."
There are nine office buildings under construction in downtown Calgary, totalling six million square feet.
"The market seems to be holding its breath coming toward the end of the year," said the Avison Young report by research manager Susan Thompson.
"The Calgary office market will be cautious and slow for the time being and faces a modest rise in vacancy throughout the upcoming year . . . Whereas there used to be an attitude of taking extra space when completing a new lease, due to growth expectations, this extra space will now be brought back to the market as sublease space and will be marketed at rates favourable to smaller tenants."
mtoneguzzi@theherald.canwest.com
© The Calgary Herald 2008
Downtown office rental rates in Calgary soared by 160 per cent from 2003 to 2007, but show a slight dip this year as the vacancy rate continues to increase.
A market report by Barclay Street Real Estate Ltd. says the overall average rental rate for office space in downtown Calgary jumped from $15.25 per square foot in 2003 to $39.60 last year. This year it has fallen to $38.20.
The report, by Michelle Pink, the company's research analyst, said increasing vacancy in the upcoming years will not be largely due to new construction but from "typical contraction of businesses and the increasing amount of sublease space."
The vacancy rate bottomed at 0.4 per cent in 2006, rose to 1.9 per cent last year and stands at 4.5 per cent today in the downtown. Vacancy is projected to rise to between 9.6 per cent and 15.3 per cent by 2011, depending on different scenarios involving new development and annual absorption rates. The high end of the range would be the worst-case scenario, if leasing activity stopped and all the buildings that are under construction continued but were not leased. {sidebar id=1}
It will be more than a year before rental rates for downtown office space come down as it will take "outward pressure" from sublease space to make landlords drop prices, said the report.
As well, 44 per cent, or 58 of Calgary's 132 downtown buildings, have changed hands over the last three years, said Nathan Revoal, associate for office leasing with Barclay Street Real Estate Ltd. in Calgary.
"I do not think that net rental rates are necessarily going to hold at today's numbers," he said. "But we feel that there will be an adjustment between the different class buildings and a further adjustment between west-end product and central core buildings.
"Historically, there has been 10 per cent to 15 per cent differential of net rental rates depending on class and recently that has obviously been blurred. When rates initially began to increase, we saw B class product leading the market with increases of net rental rates -- and now we are seeing the same downward adjustment with B class again leading the market.
"With overall vacancy projected to increase over the next two years, landlords will inevitability have to become competitive in the marketplace. The wild card, though, is sublease space."
Average rental rates in 2007 for AA class space were $50 and new developments averaged $40. This year the AA class space is at $48 with new developments at $39. Top-class space in 2003 was an average of $24.
B class space has seen an average office rental rate increase from $11.50 in 2003 to $35 last year. This year it is $34.
A fall 2008 Calgary office market report by Avison Young said vacancy in downtown Calgary continues to rise due to space being left behind by tenants moving into newly constructed buildings. Class B and C buildings are particularly feeling the effects of this with vacancy in these types of buildings climbing much faster than higher-quality buildings.
"With the level of uncertainty in the market, we expect tenants will be aggressive in negotiation for new space and on their renewals," said Todd Throndson, managing partner with Avison Young Commercial Real Estate in Calgary. "We also expect landlords for Class A product to remain relatively set at their current market levels, but do anticipate rents in Class B and C buildings to retreat over the course of the next 12 months."
There are nine office buildings under construction in downtown Calgary, totalling six million square feet.
"The market seems to be holding its breath coming toward the end of the year," said the Avison Young report by research manager Susan Thompson.
"The Calgary office market will be cautious and slow for the time being and faces a modest rise in vacancy throughout the upcoming year . . . Whereas there used to be an attitude of taking extra space when completing a new lease, due to growth expectations, this extra space will now be brought back to the market as sublease space and will be marketed at rates favourable to smaller tenants."
mtoneguzzi@theherald.canwest.com
© The Calgary Herald 2008
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