The city is seeing intensified competition, particularly in its "Class AA" segment
Calgary’s office market is seeing continued positive momentum, with the downtown vacancy rate dropping from 29.7% in Q4 to 28.9% in the first quarter, according to Avison Young.
The city’s downtown sublease segment also fell by nearly 2%, a strong indicator that companies are making a steady return to offices and reversing earlier decisions to put their spaces on the market.
In its latest report, Avison Young said that Calgary had its second straight quarter of positive absorption “as we continue to see a flight to quality, with tenants upgrading their office space and relocating, particularly to Class AA.” The first quarter of 2022 saw more than 265,000 square feet of absorption versus Q4 2021.
“The main driver of absorption was with the Class AA buildings in the downtown core as tenants upgrade their office space. Based on landlord discussions and internal activity, we see no signs of this momentum letting up in the near term,” Avison Young said.
The trend is leading to a tighter market with trophy buildings. Currently, AA vacancy in downtown Calgary is at 15.2%, down by 2.5% from Q4. Occupancy levels for this asset class in the downtown area crossed the 13-million-square-foot mark for the first time.
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“Beyond the second consecutive quarter of headline absorption numbers, we are seeing a truly healthy lease market as we are witnessing a wide range of lease sizes, across a variety of industries,” Avison Young added. “While traditional energy companies were certainly active in the quarter, we saw meaningful leasing activity from the health care, construction, and financial services sectors.”
Aside from the wide range of industries securing space, Calgary is also seeing longer lease timeframes for higher-quality buildings and increased discussion surrounding tenant improvement allowances, along with a greater desire for secure workspaces that facilitate more collaboration.
However, these developments will have to contend with strong macroeconomic headwinds moving forward, Avison Young warned.
“Despite our optimism, we have to face the reality that the Calgary office market (downtown in particular) is dominated by oil and gas companies – and while the traditional energy sector is as healthy as it has been in a long time, the change in the sector has not been fully absorbed by the downtown office market,” Avison Young said.
“In particular, the larger multi-national entities will likely be carrying a much smaller occupier footprint than they have historically. Much like the energy transition, there will be some inevitable bumps on the road when it comes to required lease space and impact on overall vacancy levels, but the overall market will be healthier as a result.”
