Calgary Office Market Report - Avison Young

Fourth Quarter 2017 / Office Market Report

Calgary

Growing existing businesses and developing and attracting new ones has even greater potential, than repurposing properties, to absorb vacant space. Late in December 2017, Calgary city

Partnership. Performance.

23.5% Calgary Overall Vacancy

26.0% Downtown Vacancy

18.4% Beltline Vacancy

17.5% Suburban North Vacancy

22.6% Suburban South Vacancy

historical oil versus calgaryDowntown downtown office vacancy rate Rate Historical Price price of Oilofversus Calgary Office Vacancy $160

30%

Source: U.S. Energy Information Administration, Avison Young $140 25% $120 20% $100

$80

15%

Vacancy Rate (%)

Many landlords are considering what alternatives are available for their older, less desirable office properties. Officeto-residential conversion is starting to take place, with one confirmed project (Artis REIT’s Sierra Place) in the works and several others being considered or in the process of being brought forward. Additionally, demolition of properties for redevelopment is being weighed for some locations. The first confirmed office property on the casualty list is the former CBC Building along Memorial Drive. This site is being repurposed as a residential condominium development.

Also, market sentiment has improved as compared to this time last year. Many economic indicators are starting to show

Market Facts

$60 10% $40 5%

$20

$0

0% January-00 June-00 November-00 April-01 September-01 February-02 July-02 December-02 May-03 October-03 March-04 August-04 January-05 June-05 November-05 April-06 September-06 February-07 July-07 December-07 May-08 October-08 March-09 August-09 January-10 June-10 November-10 April-11 September-11 February-12 July-12 December-12 May-13 October-13 March-14 August-14 January-15 June-15 November-15 April-16 September-16 February-17 July-17 December-17

2017 started the year with a prevailing feeling of uncertainty. But despite that, Calgarians have an ingrained ability to recover from misfortune and adapt to change. Take the response to the 2013 flood, one of the costliest natural disasters Canada has ever seen. Calgary's timely, structured, and outcome-focused approach to recovery was crucial in getting the City back on its feet. In the past, businesses that have weathered economic downturns have emerged stronger than when they started. Innovation and entrepreneurship is part of the standard practices in what Calgary-based companies bring to the table. While a long road to economic recovery remains ahead, new attitudes and approaches to the established commercial real estate market are being unveiled.

council approved increasing the city’s economic development investment fund to a total value of $100 million. The aim of the fund is to diversify the economy, create jobs, support ways to reduce the downtown office vacancy rate and help local companies expand. Ideas around advancement of the agri-food sector, aiding in conversion of unoccupied buildings, and enabling Calgary to be a city where autonomous vehicles can be tested are just some of the early ideas. While the fund’s terms of reference and the governance model have yet to be finalized, the proposed concept is to have Calgary Economic Development and a third party consider all opportunities or potential investments and allow Calgary to compete nationally and internationally to attract economic investment.

WTI Spot Price ($US per barrel)

Calgary’s theme for 2018 needs to be resiliency and evolution

WTI Monthly Spot Price

WTI Monthly Spot Price

Calgary Downtown Office Vacancy Rate

Calgary DT Office Vacancy Rate

avisonyoung.com

continued from page 1

One of the strongest indicators for Calgary’s recovery is that the labour market saw the unemployment rate shrink back to 7.5% as of December 2017, after it hit a 24-year high for unemployment rate in November 2016 at 10.2%. It remains one of the highest among major cities in Canada, but it is now feasible that a balanced employment market could be reached within the year. The number of jobs has

4.5%

9.3%

9.3%

9.3%

10.2%

10.1%

10.1%

9.8%

9.4%

9.3%

9.0%

7.8%

7.5%

7.5%

8.5%

8.3%

8.5%

8.9%

8.5%

8.8%

8.6%

8.9%

7.6%

9.0%

6.6% 6.7%

6.6%

6.3%

6.9%

10.5%

6.0%

832,100

826,900

828,900

833,500

837,300

837,700

833,600

827,900

822,800

820,100

819,300

818,000

815,700

810,400

805,200

802,000

797,600

796,000

794,700

800,900

803,000

802,100

797,500

797,600

801,400

809,000

814,700

818,400

816,900

818,100

Employment

Labour Force

Unemployment Rate

Dec-17

Nov-17

Oct-17

Sep-17

Jul-17

Aug-17

Jun-17

Source: Statistics Canada

Unemployment Rate

recovered. As of May 2017, employment in Calgary is back above the peak level recorded in May 2015 (827,200 people) according to the Statistics Canada Labour Force Survey. However, most of the gains were in lower-paying jobs, suggesting that while there was overall gain in employment, the new jobs were not of the same quality as those that were lost. It is hoped that as more signs

May-17

Apr-17

Mar-17

Jan-17

Feb-17

Dec-16

Nov-16

Oct-16

Sep-16

Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16

Jan-16

Feb-16

Dec-15

Oct-15

Nov-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

0.0%

Jan-15

770,000

824,500

1.5%

827,200

780,000 825,600

3.0%

820,100

790,000

818,000

4.5%

816,300

800,000

of economic recovery emerge and further economic diversification takes hold, companies will create more jobs in those highly-skilled, higher-pay occupations.

4.6%

calgary is forcasted to lead among major canadian cities

in annual gdp growth for 2018 Source: Conference Board of Canada

forecasted annual real gdp growth rates for major cities across canada Forecasted Annual Real GDP Growth Rates for Major Cities Across Canada 5.0% 4.6%

4.5% 4.0% 3.5% 3.0% 2.3%

2.6%

2.5%

2.5% 2.0%

2.1% 1.5% 1.0% 0.5% Source: Conference Board of Canada

0.0% 2017F Vancouver

AVISON YOUNG Q4 2017 - Office Market Report

6.0%

5.9%

5.6%

810,000

5.0%

820,000

6.8%

6.9%

830,000

8.8%

8.5%

840,000

9.6%

12.0%

Feb-15

For the first time in two years, crude oil has hit US$60 a barrel. Anecdotally, $60 per barrel is the price level where noticeable activity starts occurring in oil sector businesses. However, there needs to be cautious optimism at this time, because there are still concerns. The current pricing appears to be a short-term rally, with prices likely to head back below US$60 per barrel once the extreme cold weather subsides. Recent predictions believe that American drillers will put more rigs to work as oil continues to strengthen, with shale growth driving forecasts of record U.S. supply in 2018. That could undermine plans by producers including OPEC, who have pledged to extend production curbs through the end of 2018 to cut a global oversupply. Past economic recoveries in Calgary have been about rebounding prices for oil and gas, but going forward, recovery in the energy sector is going to be about being a low-cost producer and/or offering a better product (e.g. a lower carbon product). This is where technology and innovation, which are abundant in Calgary’s energy sector, need to be brought to light. Lower-cost office space, which is now readily available, will be beneficial as well.

850,000

Employment (Number of People)

recovery, but a long journey remains. According to the Conference Board of Canada Calgary’s 2017 GDP growth led the country, and is forecasted to regain a dominant position in economic growth between 2018 and 2021. However, this long-term growth is at a slower pace than Calgary experienced during the previous decade.

calgary cma employment and unemployment rate

Calgary CMA Employment and Unemployment Rate

2018F Edmonton

Calgary

2019F Saskatoon

2020F Toronto

Ottawa

2021F Montreal

Canada

2

CALGARY OVERALL amount of available space on the market increase by 10%.

Calgary Overall ABSORPTION (DEMAND)

VACANCY (SUPPLY)

RENTAL RATES

The Calgary office market finished the year on a down note. After the beleaguered Downtown market reached its peak vacancy in second quarter and started to record positive absorption in third quarter, the final quarter of the year saw vacancy increase once again. The overall vacancy rate rose from 23.1% to 23.5% during the fourth quarter of 2017.

Large contiguous blocks of office space continue to stand out in the market analysis. Contrary to the prevailing beliefs, these blocks are available predominantly on a headlease basis.

Large, contiguous blocks of office space continue to stand out in the market analysis. Contrary to the prevailing beliefs, these blocks are available predominantly on a headlease basis. Large block space, defined as one contiguous availability over 100,000 square feet (sf ) in the Downtown market, or over 30,000 sf in the Beltline and surrounding suburban markets, represent between 17% and 65% of the vacancy for their respective market segments and 31% of the city-wide vacancy. Absorption for the overall Calgary office market returned to being negative in the fourth quarter of 2017, with negative (-322,000 sf ) being absorbed. The only Calgary submarket to see positive absorption in fourth quarter 2017 was the Suburban South. Overall absorption for the year was negative (-502,000 sf ), a vast improvement over the negative (-3.3 million square feet (msf )) of absorption recorded in 2015 and negative (-2.7 msf ) of absorption recorded in 2016.

calgaryCalgary overallOffice officeVacancy vacancyRates rates Overall 30%

This increase in vacancy was due in large part to tenants opting to let their leases (or portions thereof ) lapse as they drew towards the end of their lease terms. The return of space coupled with subleases reaching the end of their terms, forced landlords to add to the already substantial headlease market. Headlease space (space available directly from the landlord) now represents 71% of Calgary’s overall availability. In the last three years, the amount of vacant office space in Calgary tripled from 5.9 msf to the current 17.9 msf. The good news is that 2017 saw vacancy increase at a much slower pace than the previous two years. The amount of vacant office space across Calgary increased by 94% in 2015 and by 41% in 2016. 2017 saw the

3

26.0% 25%

22.6%

23.5%

7.73% 6.80%

20%

18.4%

17.5%

4.91%

7.29%

3.48%

15%

calgary annual absorption by area of city Calgary Annual Absorption by Area of City 500,000

16,000

0

-189,000

95,000

68,000

-214,000

-194,000

-500,000 -538,000

-502,000

-1,000,000

-1,500,000

-2,000,000 -2,205,000 -2,500,000 -2,658,000 -3,000,000 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 Downtown

Beltline

Suburban North

Suburban South

Overall

Quoted taxes and operating costs average $17.89 per square foot (psf ) for all building classes, across the entire city. Class AA buildings average $23.48 psf, class A buildings average $18.87 psf, class B buildings average $17.07 psf, and class C buildings average $14.43 psf. These numbers are further broken down within the specific area of city sections later in this report. However, it is important to note that assessments for office properties are falling across the city. Small decreases were seen in some categories throughout the

73%

of households in Calgary own their own homes

The highest home ownership rate of major Canadian cities and the fastest growing between 2011 and 2016.

10% 18.25% 13.47%

14.05%

15.29%

16.71%

5%

0%

Downtown

Beltline

Suburban North

Headlease Vacancy

Headlease Vacancy

Suburban South

Sublease Vacancy

Overall Total Vacancy

Sublease Vacancy

specifically:

21.8 % own condominiums 58.3 % own single-family homes

2.6%

AVERAGE NUMBER OF people in each household Source: Statistics Canada


calgary overall continued from page 3

42.3%

40% 36.1%

35.3%

30%

4.3%

3.4% 26.5% 26.0% 0.6%

26.4% 22.1%

20%

22.6%

9.4% 25.8%

15.4%

4.7%

24.8% 18.3%

16.2%

13.8%

23.6%

15.3% 34.0%

31.0%

10%

24.4%

46.4%

8.4%

8.9%

8.3%

28.0% 28.5% 1.0% 3.7%

24.8% 25.4% 0.0%

25.1%

7.7%

11.0%

28.6%

9.2%

2.2%

31.9%

17.8% 0.0% 13.3%

33.1% 27.1%

24.8%

11.0%

24.4%

17.8%

4.5%

17.1% 13.2%

10.6%

10.4% 6.5%

0%

Class Class A Class B Class C Overall AA



0.0% Class Class A Class B Class C Overall AA

All Downtown

Central Core 30.0 msf (67%)

West Core 11.0 msf (24%)

East Village 4.1 msf (9%)

45.1 msf

Headlease Vacancy

Sublease Vacancy

Headlease Vacancy

Sublease Vacancy

beltline calgary office vacancy by location Beltline Calgary Office Vacancy by Location 30%

26.2% 25.3%

25%

24.0%

5.8%

7.9%

5.6%

20%

19.2% 0.0%

18.4%

20.0%

18.2% 6.1%

15.2% 0.1%

15%

14.0%

12.5% 0.0% 7.1%

6.4% 18.4%

19.4% 19.2%

15.1%

2.1%

18.2% 15.3%

13.9%

13.5%

13.7% 10.7%

5%

4.3% 0.0%

3.3% 0.0%

7.0%

6.8%

4.3%

3.3%

4.8% 0.0%

6.8% 12.5%

1.3%

9.4% 5.6%

4.8%

Class A Class B Class C Overall




0.0% 0.0% 0.0% 0.0% Class A Class B Class C Overall

All Beltline

Beltline Core

8.3 msf

6.4 msf (77%)

17th Avenue 0.4 msf (5%)

Mission 1.4 msf (16%)

Sunalta 0.2 msf (2%)

Sublease Vacancy

Sublease Vacancy

To Airdrie, Red Deer and Edmonton

City of Calgary

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Click HERE to view the entire series.

McDonald

144 Ave. N.W.

144 Ave. N.W. Symons Valley Rd

1A

N

566

Balzac

City Boundary Stoney Trail Current/Future LRT Line Current/Future Major Transportation Route/ Main Hwy

e

In this new series of graphs (above), view the differences in vacancy rates for further geographic breakdowns of the four main Calgary submarkets.

566 772

LEGEND

Traffic Volumes (VPD) 2016

Bonaven

Headlease Vacancy

Headlease Vacancy

Dr. Quee

0%

11.5%

10.7% 0.0%

James

10%

15.3% 0.0%

4.6%

4.9%

13.2%

Tussl

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15.9%

50%

Sarcee

As Calgary comes off the bottom of this downturn, it is expected that a flight-toquality will continue. Flight-to-quality is where tenants move away from class B and C buildings and move to class A and AA buildings at almost the same or lower cost structure.

62.3%

60%

77 St.

While energy and energy servicing companies continue to make up a large share of the leasing transactions being recorded, growth from areas such as information and technology, not-for-profits, government, business services and green technology are definitely being noticed. Also, activity by smaller tenants is growing noticeably. Demand for space under 5,000 sf continues to be high. However, due to an abundance of existing options in this size range and pressure on landlords to demise down larger blocks of space that aren’t moving, rental rates remain competitive and inducements (such as free rent and improvement allowances) are substantial in many cases. Meanwhile, the market for large pockets of space will continue to have significant competition for the foreseeable future, maintaining the downward pressure on rental rates within this category.

70%

Signal Hill Dr.

There was one new building completed in fourth quarter 2017, Royal Vista Centre (49,000 sf ), which had no leasing in place at the time of completion. Approximately 738,000 sf of new office space, in six buildings, remains under construction across Calgary. The majority of this is in Downtown (62%), followed by the Suburban North (24%), Beltline (9%), and Suburban South (5%). Very little new construction is anticipated to be announced in the city for several years, given the widespread availability across the entire Calgary office market.

downtown calgary office vacancy by location Downtown Calgary Office Vacancy by Location

To Bragg Creek

year, and it is expected property taxes in the downtown will continue to decline in the near future.

2A

2 Trail

C.P.R.

210 Ave.

To Okotoks, High River, and Fort MacLeod

403.262.3082 avisonyoung.com

City of Calgary base map supplied by:


4

Downtown Downtown

downtown calgary annual office absorption

Downtown Calgary Annual Office Absorption 1,000,000

ABSORPTION (DEMAND)

VACANCY (SUPPLY)

RENTAL RATES

500,000

376,000

0

The Downtown Calgary office market saw its vacancy peak in second quarter 2017, however turbulence is still expected on the long journey to recovery. Fourth quarter 2017 saw a return to negative absorption, but vacancy remains below the peak value of 26.4%. Downtown Calgary vacancy, as of fourth quarter 2017 is 26.0%. This is up from 25.7% in third quarter 2017, and from 23.9% 12 months ago in fourth quarter 2016. Total vacancy for the Downtown office market is 11.9 msf, broken down by: 8.3 msf of headlease space (70%) and 3.5 msf of sublease space (30%). It is anticipated that sublease availability will continue to be seen transitioning to headlease availability over the course of the next year as sublease terms continue to expire. 2017 saw the amount of vacant space in the Downtown market increase by 13%. This is a much slower pace downtown calgary office vacancy rates

Downtown Calgary Office Vacancy Rates 35%

31.9% 3.37%

30%

26.5%

26.4%

0.65%

26.0%

25%

22.1% 20%

7.73%

11.01%

8.29% 15%

10%

18.25% 15.38%

13.76%

5%

0%

Class AA

Class A

Headlease Vacancy

Headlease Vacancy

5

-189,000 -500,000

-1,000,000

-1,500,000

1,360,000

-2,000,000 -2,205,000 -2,500,000

-3,000,000 -3,068,000 -3,500,000

2013

2014

2015

2016

2017

than the previous two years. The amount of vacant office space in Downtown Calgary increased by 133% in 2015 and by 51% in 2016. In the last three years combined, the amount of vacant office space in Downtown Calgary quadrupled from 3.0 msf to the current 11.9 msf. Fourth quarter 2017 saw the return to negative absorption for all building classes, except for class C buildings. Over the last three months, class AA buildings saw negative (-124,000 sf ) of absorption, class A saw negative (-108,000 sf ) of absorption, class B saw negative (-72,000 sf ) of absorption, and class C saw positive 17,000 sf of absorption. Vacancy by class is now: class AA – 26.4%, class A – 22.1%, class B – 31.9%, and class C – 26.5%.

28.57% 25.82%

Class B

Class C

Sublease Vacancy


Sublease Vacancy

in 2015 and negative (-2.2 msf ) of absorption recorded in 2016. Thanks to the extreme nature of the downturn over the last few years, the 5-year average annual absorption is negative (-1,289,000 sf per year) and the 10-year average annual absorption is now negative (-162,000 sf per year).

The amount of space coming onto the market has slowed down substantially. Absorption in the Downtown office market for fourth quarter 2017 was negative (-288,000 sf ). For all of 2017 downtown Calgary has a cumulative negative absorption of (-189,000 sf ). This is a noticeable improvement over the negative (-3.1 msf ) of absorption recorded

Average asking rents for headlease space in Downtown range between $4 and $38 per square foot, per annum. New Construction buildings typically range between $32 and $36 psf (average $35 psf ). Class AA buildings typically range between $22 and $26 psf (average $24 psf ). Class A buildings typically range between $13 and $17 psf (average $15 psf ). Class B buildings typically range between $8 and $12 psf (average $9 psf ). Class C buildings typically range between $4 and $7 psf (average $6 psf ). Location, building quality, size of space, and length of term will all play into ultimately determining what the asking rate for a property is. Sublease opportunities can offer substantial discounts from these rates and vary widely. Similarly, quoted taxes and operating costs average $21.11 psf for all building classes, in the Downtown market. Class AA buildings average $23.48 psf, class A buildings average $21.00 psf, class B buildings average $18.11 psf, and class C buildings average $16.16 psf. There are 14 availabilities on the market in Downtown Calgary that have over 100,000 sf available as one contiguous block. These 14 blocks of space represent 23% of the total availability of space in the Downtown market and 67% of this space is available on a headlease basis. Brookfield Place Calgary – East was added to inventory in second quarter 2017. This 1.4 msf office tower is 79% pre-leased, but the occupancy for the building will be phased in over the next several quarters as it will take time for fixturing and move-in to be completed. This one building increased the downtown office inventory by 3%. As a result of the current economic conditions and weak demand for space no new development is


Downtown labour


of that mark (26.3%) when TELUS Sky comes online and trending downwards thereafter.

expected to be announced in Calgary’s downtown core for several years. The last remaining office building under construction in downtown Calgary is TELUS Sky. It contains 460,000 sf of new office space, which will result in a 1% increase in inventory, and is 39% preleased - with over a year to go before occupancy starts to take place.

32.5%

are immigrants

downtown calgary office market average asking rents Downtown Office Market Average Asking Rents Headlease - High-Low-Average - ($/SF/Annum) $40.00

66%

have postsecondary education

$35.00

$35.00

employment: 66.5% ofarecalgarians employed

$30.00

Looking to the future, without a substantial change in the Calgary economy, TELUS Sky will potentially push vacancy up to 27.7%, using pessimistic assumptions. The current realistic prediction is that absorption will be flat for the first half of 2018, positive 100,000 sf in each of Q3 and Q4 2018, and rising to 150,000 sf per quarter in 2019 and beyond. These reasonable assumptions indicate that Q2 2017 was the peak vacancy for this downturn, at 26.4%, resulting in vacancy reaching just shy

of calgary's labour force:

$25.00

$24.00

vs. the canadian average of 60.2%

$20.00

63.3% ofareaboriginals employed

$15.00

$15.00


$10.00

(15 - 24 52.3% ofyrscalgarians old) are employed

$9.00 $6.00

$5.00

vs. the canadian average of 51.9% (64+ 3.6% ofyrscalgarians old) are employed

$0.00 New Construction

Class AA

Range

Class A

Class B

Class C


Average

Source: Calgary Economic Development

downtown calgary office historical and projected vacancy Downtown Calgary Office Historical and Projected Vacancy

Reasonable Assumptions:

30%

26.4% 25%

25.7%

26.0% 26.3%

26.5% 26.7%

27.7%27.7%27.7%27.7%27.7% 27.6% 27.5%

26.0%26.0%26.0% 25.8% 26.3% 26.0%

23.9%23.9% 22.9%

25.6% 25.3%

25.0% 24.7%

27.3% 27.0%

2018: Flat absorption in Q1 and Q2, positive 100,000 sf in each of Q3 and Q4 24.3% 24.0%

23.7%

21.1% 20%

2019 and beyond: Positive 150,000 sf in each quarter

17.6% 16.3%

Pessimistic Assumptions:

15%

0% Q1

Q2

Q3

2014

Q4

Q1

Q2

Q3

2015

Q4

Q1

Q2

Q3

Q4

Q1

Q2

2016 Vacancy Rate - Reasonable Assumptions

Vacancy Rate - Reasonable Assumptions


TELUS Sky (460,000 sf)

5%

2018: Negative 150,000 sf in Q1, and negative 100,000 sf in each of Q2, Q3 and Q4

Brookfield Place - East (1,400,000 sf)

7.2% 6.1% 6.2% 6.2%

707 Fifth (564,000 sf)

9.1%

Calgary City Centre (853,000 sf)

10%

Eau Claire Tower (613,000 sf)

12.2% 10.7%

Q3

2017

Q4

Q1

Q2

Q3

2018

Q4

2019: Flat absorption 2020: Positive 50,000 sf in each of Q1 and Q2, positive 100,000 sf in each of Q3 and Q4 Q1

Q2

Q3

2019

Q4

Q1

Q2

Q3

Q4

2020

Vacancy Rate - Pessimistic Assumptions

Vacancy Rate - Pessimistic Assumptions

6

BELTLINE Beltline ABSORPTION (DEMAND)

VACANCY (SUPPLY)

RENTAL RATES

The vacancy rate in the Beltline office market edged upwards again to sit at 18.4% in fourth quarter 2017. This is up from 17.3% in third quarter 2017, and from 16.0% 12 months ago in fourth quarter 2016. Vacancy appears to have peaked during this downturn for this market segment at 19.1% in the third quarter of 2016. beltlilne calgary office vacancy by class Beltline Calgary Office Vacancy Rates 25%

24.0%

5.63% 20%

18.4%

15.2%

4.91%

0.15%

15%

13.2%

10%

6.41% 18.41% 15.09% 13.47%

5% 6.84%

0%

Class A

Class B

Headlease Vacancy Headlease Vacancy

Class C Sublease Vacancy Sublease

Overall Total Vacancy Vacancy

This increase in vacancy comes about through a 92,000-sf increase in headlease space, and an increase of less than 2,000 sf within the sublease market this quarter. Total vacancy for the Beltline office market is 1.5 msf, broken down by: 1,120,000 sf of headlease space (73%) and 409,000 sf of sublease space (27%). 2017 saw the amount of vacant space in the Beltline market increase by 16%.

7

The amount of vacant office space in Beltline Calgary increased by 45% in 2015 and by 3% in 2016. In the last three years combined, the amount of vacant office space in Beltline Calgary increased 73% from 883,000 sf to the current 1.5 msf.

beltline calgary office market average asking rents Beltline Office Market Average Asking Rents Headlease - High-Low-Average - ($/SF/Annum) $30.00

$25.00

$22.00

Looking at the breakdown between building classes, fourth quarter 2017 saw positive absorption for class A buildings and negative absorption for class B and C buildings. Over the last three months class A buildings saw positive 44,000 sf of absorption, class B saw negative (-108,000 sf ) of absorption, and class C saw negative (-30,000 sf ) absorption. Vacancy by class is now: class A – 13.2%, class B – 24.0%, and class C – 15.2%. Absorption in the Beltline office market for fourth quarter 2017 was negative (-94,000 sf ). It is unfortunate that negative absorption has returned throughout 2017, this has pushed the year to be the worst for negative absorption since 2013. The Beltline office market’s 5-year average annual absorption is 112,000 sf per year and the 10-year average is 174,000 sf per year. Average asking rents for headlease space in the Beltline range between $5 and $27 per square foot, per annum. Class A buildings typically range between $18 and $27 psf (average $22 psf ). Class B buildings typically range between $12 and $18 psf (average $15 psf ). Class C buildings typically range between $5 and $12 psf (average $10 psf ). Location, building quality, size of space, and length of term will all play into ultimately determining what the asking rate for a property is. Sublease opportunities can offer substantial discounts from these rates and vary widely.

$20.00

$15.00

$15.00

$10.00

$10.00

$5.00

$0.00 Class A

Range

Class B

Class C

Average

Similarly, quoted taxes and operating costs average $18.22 psf for all building classes, in the Beltline market. Class A buildings average $19.90 psf, class B buildings average $17.32 psf, and class C buildings average $16.49 psf.

According to ATB Financial’s Business Beat Index, which measures Alberta business owners’ confidence in their own business operations, economic optimism is up compared to the past two years: CLICK HERE

Calgary Q4 2017 Office Market Statistics

DOWNLOAD CHART HERE


BELTLINE continued from page 7

beltline calgary annual office absorption

There are six availabilities in Beltline Calgary with more than 30,000 sf available as one contiguous block. These six blocks of space represent 17% of the total availability of space in the Beltline office market and 69% of this space is available on a headlease basis.

Beltline Calgary Annual Office Absorption 1,200,000 1,063,000

How does this compare to other markets, provinces and the Canadian average? What industries have been gaining jobs in the last year? View Calgary specific analysis and graphs of Statistics Canada's Labour Force Survey for December 2017, prepared by Avison Young's Calgary Research team (monthover-month and year-over year comparisons).

1,000,000

800,000

600,000

No new projects commenced in fourth quarter 2017, however two projects, 14th Street Office Building at 1506 – 11th Avenue SW and Mount Royal West, remain under construction. These building contain a total area of 66,000 sf and combined are 47% pre-leased at this time - with all of this pre-leasing being in the 14th Street Office Building.

400,000

200,000

16,000

0 -80,000 -200,000 -227,000

Calgary's Unemployment Rate is now 7.5%.

-214,000

CLICK HERE to view

-400,000 2013

2014

2015

2016

2017

Calgary Q4 2017 Leasing Transactions calgary Notable q4 2017 notableOffice office leasing transactions Downtown Tenant

Building Name

Address

Size (sf)

Deal Type

Plains Midstream Canada

Plains Midstream Plaza

607 - 8th Avenue SW

167,000

Renewal - Expansion

Spartan Energy*

The Bow

500 Centre Street SE

40,000

Sublease - New

Aon

Eau Claire Tower

620 - 3rd Avenue SW

27,000

Sublease - New

Beltline Tenant Copithorne and Blakely Corporation*

Building Name Biscuit Block

Address 438 - 11th Avenue SE

Size (sf) 7,000

Deal Type Sublease - New

Katz Group Real Estate*

Joffre Place

708 - 11th Avenue SW

7,000

Headlease

Trilogy Software Inc.*

Dorchester Square

1333 - 8th Street SW

5,000

Headlease

Suburban North Tenant

Building Name

Address

Size (sf)

Deal Type

Low Glenn & Card LLP*

Sunridge Business Park I

2886 Sunridge Way NE

8,000

Headlease

Dynacare Gamma Laboratory*

Willowglen Business Park 3

809 Manning Road NE

4,000

Headlease

S. Shewchuk & Associates Ltd.*

Stockman Centre

2116 - 27th Avenue NE

3,000

Headlease - Renewal

Suburban South Tenant

Building Name

Address

Size (sf)

Deal Type

HOCS Projects*

Railway Corporate Centre A

6807 Railway Street SE

26,000

Headlease

Aware 360*

Glenmore Professional Centre

1201 - 66th Avenue SW

11,000

Headlease

420 Dispensaries*

Tull Business Park

5334 - 72nd Avenue SE

6,000

Headlease

* Indicates transactions Avison Young was involved in


8

suburban Suburban North

absorption is 28,000 sf per year.

suburban north calgary annual office absorption

Average asking rents for headlease space in the Suburban North range between $6 and $30 per square foot, per annum. New Construction buildings typically range between $25 and $30 psf, (average $27 psf ). Class A buildings typically range between $18 and $26 psf (average $19 psf ). Class B buildings typically range between $9 and $16 psf (average $13 psf ). Class C buildings typically range between $6 and $12 psf (average $9 psf ). Location, building quality, size of space, and length of term will all play into ultimately determining what the asking rate for a property is. Sublease opportunities can offer substantial discounts from these rates and vary widely.

Suburban North Calgary Annual Office Absorption 200,000

ABSORPTION (DEMAND)

VACANCY (SUPPLY)

The Suburban North office vacancy rate increased to 17.5% in fourth quarter 2017, up from 15.4% in third quarter 2017, and from 16.9% 12 months ago. Vacancy appears to have peaked during this downturn for this market segment at 21.3% in the third quarter of 2016. Headlease space increased by 259,000 sf, while sublease space decreased by 24,000 sf during the last three months. Total vacancy for the Suburban North office market is 1.7 msf, broken down by 1.4 msf of headlease space (80%) and 344,000 sf of sublease space (20%). 2017 saw the amount of vacant space in the Suburban North market increase by 16%. The amount of vacant office space suburban north calgary office vacancy by class Suburban North Calgary Office Vacancy Rates 25%

20%

18.7%

18.6% 1.10%

17.5%

3.23%

3.48%

14.6%

15%

5.28% 10% 17.47% 15.52% 14.05% 5%

9.27%

0%

Class A

Class B

Headlease Vacancy Headlease Vacancy

Class C Sublease Vacancy Sublease

Overall

68,000 0 -14,000

-200,000

-194,000

-400,000

-600,000

-800,000 -871,000

-1,000,000

2013

2014

2015

2016

2017

North Calgary increased 80% from 963,000 sf to the current 1.7 msf. Fourth quarter 2017 saw negative absorption for class A and B buildings, and positive absorption for class C buildings in the Suburban North. Over the last three months class A buildings saw negative (-32,000 sf ) of absorption, class B saw negative (-67,000 sf ) of absorption, and class C saw positive 30,000 sf of absorption. Vacancy by class is now: class A – 18.7%, class B – 14.6%, and class C – 18.6%. Absorption in the Suburban North office market for fourth quarter 2017 was negative (-69,000 sf ). The 5-year average annual absorption for the Suburban North office market is negative (-177,000 sf per year), and the 10-year average annual

Similarly, quoted taxes and operating costs average $14.40 psf for all building classes, in the Suburban North market. Class A buildings average $15.35 psf, class B buildings average $13.56 psf, and class C buildings average $12.18 psf. There are 13 availabilities in Suburban North Calgary with more than 30,000 sf available in one contiguous block. These 13 blocks of space represent 42% of the total availability of space in the Suburban North office market and 77% of this space is available on a headlease basis. One new office building was added to inventory in fourth quarter 2017, Royal Vista Centre (49,000 sf ), which had no leasing in place at the time of completion. Two office buildings remain under construction in Suburban North Calgary. These are: Hexagon Calgary

calgary office market average taxes and operating costs

Average Taxes & Operating Costs

Total Vacancy Vacancy

in Suburban North Calgary increased by 35% in 2015 and by 14% in 2016. In the last three years combined, the amount of vacant office space in Suburban

9

127,000

RENTAL RATES

Downtown Beltline Suburban North Suburban South Overall

Class AA $23.48 $23.48

Class A $21.00 $19.90 $15.35 $14.98 $18.87

Class B $18.11 $17.32 $13.56 $14.48 $17.07

Class C All Classes $16.16 $21.11 $16.49 $18.22 $12.18 $14.40 $9.67 $14.46 $14.43 $17.89

(per square foot, per annum)


suburban suburban north office market average asking rents

Suburban North Office Market Average Asking Rents Headlease - High-Low-Average - ($/SF/Annum) $35.00

market is 2.7 msf, broken down by 1.84 msf of headlease space (68%) and 879,000 sf of sublease space (32%).

suburban south calgary annual office absorption Suburban South Calgary Annual Office Absorption 1,500,000 1,355,000

$30.00

$27.00 $25.00

$20.00

$19.00

$15.00

$13.00 $10.00

$9.00

Fourth quarter 2017 saw positive absorption for class A and C buildings and negative absorption for class B buildings in the Suburban South office market. Over the last three months class A buildings saw positive 106,000 sf of absorption, class B saw negative (-13,000 sf ) of absorption, and class C saw positive 34,000 sf of absorption. Vacancy by class is now: class A – 25.7%, class B – 13.6%, and class C – 12.6%.

1,000,000

500,000

95,000 0 -141,000

-224,000

$5.00

suburban south calgary office vacancy by class

-500,000

Suburban South Calgary Office Vacancy Rates

-538,000

30%


Class A

Range

Class B

Class C

Average

25.7%

-1,000,000

2013

25%

Campus, and One North Business Centre. They represent 181,000 sf of new space, which will increase the Suburban North office inventory by 2%. The good news is the Hexagon Calgary Campus building is being purposebuilt for its owner-user, and as such, combined these two buildings are 93% pre-leased.

2016

2017

9.50% 20%

7.29%

15%

13.6% 0.34%

12.6% 1.12%

10% 16.16%

15.29% 13.22% 11.45%

5%

Suburban South

0%

Class A

VACANCY (SUPPLY)

2015

22.6%


ABSORPTION (DEMAND)

2014

RENTAL RATES

Class B

Headlease Vacancy

Headlease Vacancy

The Suburban South office vacancy rate decreased to 22.6% in fourth quarter 2017, down from 23.6% in third quarter 2017, but up from 22.5% twelve months ago in fourth quarter 2016. Vacancy appears to have peaked during this downturn for this market segment at 24.3% in the first quarter of 2017. Headlease space decreased by 134,000 sf over the last quarter, while sublease space increased by 7,000 sf. Total vacancy for the Suburban South office AVISON YOUNG Q4 2017 - Office Market Report

Class C Sublease Vacancy


Sublease Vacancy

Absorption in the Suburban South office market for fourth quarter 2017 was positive 127,000 sf. Thanks to positive absorption in the first and second quarters of 2017, the 2017 annual absorption for the Suburban South office market is positive 95,000 sf, making it the best performing submarket in Calgary for the year. The 5-year annual average absorption is 109,000 sf per year, and the 10-year

annual average absorption is 257,000 sf per year. Average asking rents for headlease space in the Suburban South range between $6 and $30 per square foot, per annum. New Construction buildings typically range between $25 and $30 psf, (average $27 psf ). Class A buildings typically range between $15 and $25 psf, (average $19 psf ). Class B buildings typically range between $10 and $16 psf, (average $14 psf ). Class C buildings typically range between $6 and $12 psf, (average $10 psf ). Location, building quality, size of space, and length of term will all play into ultimately determining what the asking rate for a property is. Sublease opportunities can offer substantial discounts from these rates and vary widely. Similarly, quoted taxes and operating average $14.46 psf for all building classes, in the Suburban South market.

10

suburban continued from page 10

suburban south office market average asking rents Suburban South Office Market Average Asking Rents Headlease - High-Low-Average - ($/SF/Annum) $35.00

There are 20 availabilities in Suburban South Calgary with more than 30,000 sf available in one contiguous block. These 20 blocks of space represent 65% of the total availability of space in the Suburban South office market and 63% of this space is available on a headlease basis.

$30.00

$27.00 $25.00

$20.00

$19.00

$15.00

$14.00

$10.00

$10.00

$5.00


Class A

Range

Class A buildings average $14.98 psf, class B buildings average $14.48 psf, and class C buildings average $9.67 psf.

Class B

Average

Class C

No new buildings were added to inventory in fourth quarter 2017. One office building remains under construction in Suburban South Calgary: Macleod Professional Centre. This building contains 31,000 sf of new space, and is currently 39% preleased. Given the current, widespread availability in the office market and slow absorption of space, limited new construction is anticipated to commence in 2018.

Did You Know? Did you know Avison Young is considered one of the most diverse firms in the commercial real estate industry with an overall makeup of 40% women, according to a CREW white paper and Avison Young case study? CLICK HERE to view

q4 2017Office under construction and new supply Calgary calgary Q4 2017 Construction Summary

Downtown Under Construction Building Name TELUS Sky

Address 110 - 7th Avenue SW

Building Name 14th Street Office (RECA Building) Mount Royal West

Address 1506 - 11th Avenue SW 1508 - 8th Street SW

Building Name Royal Vista Corner

Address 9 Royal Vista Drive NW

Office Area (sf) Expected Completion 460,000 Q4 2018

% Leased / Pre-Leased 39%

LEED Target Platinum

% Leased / Pre-Leased 82% 0%

LEED Target


LEED Target

% Leased / Pre-Leased 100% 35%

LEED Target


LEED Target

Beltline Under Construction Office Area (sf) Expected Completion 38,000 Q1 2018 28,000 Q2 2018

Suburban North New Supply Office Area (sf) Expected Completion 49,000 Complete

Suburban North Under Construction Building Name Hexagon Calgary Campus One North Business Centre

Address 10921 - 14th Street NE 1348 Northmount Drive NW

Building Name Macleod Professional Centre

Address 3916 Macleod Trail SE

Office Area (sf) Expected Completion 160,000 Q2 2018 20,000 Q2 2018

Suburban South Under Construction

11

Office Area (sf) Expected Completion 31,000 Q1 2018


featured downtown Selkirk House

featured beltline BROCHURE

555 - 4th Avenue SW SUBLEASE Opportunity Up to 11,149 sf (chalkline opp.) Gulf Canada Square

BROCHURE

401 - 9th Avenue SW SUBLEASE Opportunity From 3,567 sf up to 340,126 sf

ATCO Centre I & II

909 & 919 - 11th Avenue SW HEADLEASE / SUBLEASE From 2,271 sf up to 113,573 sf 340 - 12th Avenue SW

340 - 12th Avenue SW HEADLEASE Opportunity From 1,685 sf up to 9,860 sf

featured downtown

BROCHURE

WhiteWater Place

BROCHURE

1717 - 10th Street NW HEADLEASE Opportunity 2,092 sf 325 Manning Road NE

325 Manning Road NE HEADLEASE Opportunity From ±1,000 sf - ±14,000 sf

5757 - 4th Street SE

BROCHURE

5757 - 4th Street SE HEADLEASE Opportunity 11,500 sf BROCHURE

Corner Court

BROCHURE

6223 - 2nd Street SE HEADLEASE Opportunity From 5,901sf up to 13,416 sf

Avison Young Calgary Office Team

F1RST Tower

Existing First Class leaseholds including demountable wall systems

featured suburban south

featured suburban north BROCHURE

BROCHURE

Plus

+ 15 connected

15

On-site Professional Management & 24/7 Security

Walking/Bike trails

Fitness centre in the building

Access to restaurants, coffee shops, eateries & services

Underground parking

411 - 1st Street SE HEADLEASE Opportunity From 11,250 sf up to 330,965 sf

Taylor Archer | 403.232.0727

Jordyn Malkinson | 403.232.4316

Loveleen Bhatti | 403.232.4337

Miri Mammadov | 403.232.4300

Roseleen Bhatti | 403.232.4325

Paul McKay | 587.293.3365

Rachel Carter | 403.232.4304

Alexi Olcheski | 403.232.4332

Eric Demaere | 403.232.4366

Nairn Rodger | 403.232.4341

Spencer Duff | 403.232.4387

Kirsten Scott | 587.293.3363

Steve Goertz | 403.232.4322

Glenn Simpson | 403.232.4329

Larry Gurtler | 403.232.4326

Anna Sorensen | 403.232.4383

Eric Horne | 403.232.4339

Mark St. Pierre | 403.232.4319

Chris Howard | 403.265.9552 ext. 223

Todd Throndson | 403.232.4343

Jason Kopchia | 587.293.3361

Alex Wong | 403.232.4327

Tinyan Leung | 403.232.4334

Allan Zivot | 403.232.4307

Research

Business Condominium Team

Susan Thompson | 403.232.4344

Pali Bedi | 403.232.4311

Graphics Penelope Johnson | 403.232.4308

Fred Clemens | 403.232.4312 Puneet Nagpal | 403.232.0725

Eighth Avenue Place West - Suite 1200, 585 - 8th Avenue SW, Calgary, AB T2P 1G1 | T 403.262.3082 F: 403.262.3325 © 2018 Avison Young Real Estate Alberta Inc. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.


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