Calgary Office Market Report - Avison Young

First Quarter 2018 / Office Market Report

Calgary Calgary has returned to positive economic growth, but the long-term view of the market remains challenged.

25.6% Downtown Vacancy

18.5% Beltline Vacancy

17.7% Suburban North Vacancy

21.8% Suburban South Vacancy

calgary cma employment and unemployment rate

Calgary CMA Employment and Unemployment Rate 850,000 8.5% 8.9% 8.7% 8.5% 8.8% 9.0% 9.2% 9.6% 10.1% 10.3% 10.2% 9.9% 9.4% 9.2% 9.2% 9.3%

12.0%

840,000

810,000

7.6%

10.5%

9.0%

8.9% 8.5% 8.4% 8.4% 8.1% 7.7% 7.5% 7.6% 7.9% 8.2%

4.5% 5.0% 5.5% 5.8% 6.0% 6.4%

820,000

7.0% 6.8% 6.8% 6.6% 6.7% 6.8%

830,000

7.5%

6.0%

800,000

4.5%

790,000

3.0%

780,000

1.5%

770,000

0.0%

Employment Employment

Partnership. Performance.

Calgary Overall Vacancy

816,500 818,600 820,600 825,000 826,000 823,600 817,700 816,700 817,900 815,100 810,000 802,600 798,500 798,100 802,400 802,300 799,300 793,300 794,700 796,900 801,500 806,700 813,100 818,100 819,200 819,500 820,100 822,300 827,000 833,300 837,400 837,400 833,400 830,000 828,900 834,100 840,900 844,500 842,900

One of the strongest indicators for Calgary’s recovery is that employment has fully recovered from the losses incurred over the last two years. In May 2015 Calgary’s employment peaked at 826,000 people before beginning its downward slide through the downturn. As of March 2018, Calgary’s employment is 842,900 people (16,900 people above that previous peak). In terms of the unemployment rate, recovery does not occur in a straight line, but the general trend has been downwards over the last year. The unemployment rate for March 2018 increased to 8.2%, from 7.5% in December 2017, but is down from 9.2% 12 months ago in March 2017. Calgary’s unemployment rate remains distant from the low of 4.4% recorded in November 2014, but is well below the

However, like much of Calgary’s economy, excitement around these gains needs to be tempered. Most of the gains were in lowerpaying jobs, suggesting that while there was overall gain in employment, the new jobs were not of the same quality as those that were lost. The good news is that over the last year Full-Time employment has shown positive gains, while Part-Time employment has seen a decline in the number of positions. Also, Calgary’s labour force has grown faster than it has created jobs in the past few months. While this is good news that people are entering or returning to the local job market, it is putting upward pressure on Calgary’s unemployment rate. It is hoped that as economic recovery takes a stronger hold, companies will create more jobs in those highly-skilled, higher-pay occupations.

23.2%

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18

According to the Conference Board of Canada Calgary’s 2017 GDP growth led the country at 6.9%, and is forecasted to regain a dominant position in economic growth between 2018 and 2021. Calgary’s real GDP is forecasted to grow by 2.5% in 2018, fully recouping the economic losses experienced after the oil price collapse in 2014. However, long-term growth is forecasted to take place at a slower pace than Calgary experienced during the previous decade.

peak unemployment rate of 10.3% which was recorded over a year ago in November 2016.

Employment (Number of People)

After two years of crushing recession, Calgary’s economy began to grow again in 2017. Despite the recession officially being behind us now, its negative effects continue to linger. The path to recovery remains long and difficult. Looking forward, the forecast is not for clear, blue skies, but there are no storm clouds gathering either. This year’s focus will be about building momentum for the future.

Market Facts

Unemployment Rate Unemployment

Rate

Source: Statistics Canada

avisonyoung.com

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

continued from page 1

Another opportunity for the economy to find success is diversification. Growth in sectors outside of the traditional major players has great potential. Students today are preparing for jobs that didn’t exist ten year ago. Calgary is wellpositioned to take advantage of the opportunity to prepare for and create the businesses, jobs and workplaces of tomorrow. Calgary continues to have one of the youngest age demographic for a work force in any major city in Canada and this will translate into opportunities for the city. In March 2018, Calgary City Council approved the city’s $100 million Economic Development Investment Fund in full, including the creation of a new city-owned agency. 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,

30%

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

$80

15%

Vacancy Rate (%)

WTI Spot Price ($US per barrel)

$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

Getting oil to tidewater is the largest dark cloud hanging over Calgary’s economic recovery. Oil prices for West Texas Intermediate (WTI) have been above US$60 a barrel since late December. However, Alberta oil continues to trade at a discount. Western Canadian Select (WCS), which is the benchmark price for much of the crude oil in Alberta, had a price differential of US$24.28 a barrel (or 39%) below WTI in first quarter 2018. While WTI benchmark prices continue to strengthen and perform well from a global market perspective, WCS differentials widened as a result of increasing inventories and the inability to increase exports to markets other than the U.S. According to a recent Alberta Government provincial fiscal report, even if three new oil pipelines (Keystone XL, the Trans Mountain expansion, and Enbridge’s Line 3 replacement project) are built, the province will still face constraints moving crude to market throughout 2018 and 2019. In order for Calgary’s predominantly energy-based economy to get back into firm growth mode, a solution to the ongoing pipeline bottleneck issues needs to be found.

$160

WTI Monthly Spot Price

Calgary Downtown Office Vacancy Rate

WTI Monthly Spot Price

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. This new agency will consider all opportunities or potential investments and allow Calgary to compete nationally and internationally for projects that will enable economic growth, retention and diversification, create employment and increase the property tax assessment

Calgary DT Office Vacancy Rate

base. It is anticipated that applications for funding will begin being accepted in second quarter 2018. While things are looking up in terms of Calgary’s economic growth, and the groundwork is being laid for future growth and evolution, it is going to take more time before a higher share of Calgarians feel their outlook has moved towards the positive side of the scale.

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AVISON YOUNG Q1 2018 - Office Market Report

2

CALGARY OVERALL Calgary Overall ABSORPTION (DEMAND)

VACANCY (SUPPLY)

RENTAL RATES

The Calgary office market started the year on a positive note. After the beleaguered Downtown market reached its peak vacancy in second quarter 2017, the first quarter of 2018 saw vacancy make an improvement. The overall vacancy rate decreased to 23.2% during the first quarter of 2018 from 23.5% in fourth quarter 2017, but up from 22.5% 12 months ago in first quarter 2017. This decrease in vacancy was predominantly due to the absorption of space in the Downtown market, including the first occupancy in the newly completed Brookfield Place tower being completed. Headlease space (space available directly from the landlord) currently represents 74% of Calgary’s overall availability. 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 63% of the vacancy for their respective market segments and 33% of the city-wide vacancy. Many landlords are considering what alternatives are available for their older, less-desirable office properties. The second office-to-residential conversion of this downturn is in the works, this time taking place in the Beltline. Removing some older, obsolete buildings from Calgary’s office inventory will help with the overall vacancy problem, and a number of buildings are being considered for this program. 2018 will likely see more of these come to realization. Absorption for the overall Calgary office

3

market returned to being positive in the first quarter of 2018, with positive 212,000 sf being absorbed. The positive absorption was seen in the Downtown and Suburban South office market segments in first quarter 2018, while the Beltline and Suburban North office market segments saw negative absorption. The 5-year average annual absorption for Calgary’s overall office market is negative (-1,245,000 sf ) per year and the 10-year average is 284,000 sf per year. The ranges for average asking rents are starting to tighten as leasing activity increases. While the averages have not seen much movement over the last quarter, thanks to a larger number of transactions there is more information available to more accurately identify what range they should fall within. Quoted taxes and operating costs average $17.59 per square foot (psf ) for all building classes, across the entire city. Class AA buildings average $23.28 psf, class A buildings average $18.58 psf, class B buildings average $16.72 psf, and class C buildings average $14.23 psf. These numbers are further broken down within calgaryCalgary overallOffice officeVacancy vacancyRates rates Overall 30%

25.6% 25%

23.2% 21.8%

6.75% 20%

18.5%

5.81%

3.34%

5.41%

15%

10%

6.01%

17.7%

18.84% 16.00% 13.07%

17.17%

14.34%

5%

0%

Downtown

Beltline

Suburban North

Headlease Vacancy

Headlease Vacancy

Suburban South

Sublease Vacancy

Overall Total Vacancy

Sublease Vacancy

calgary annual absorption by area of city Calgary Annual Absorption by Area of City 300,000 212,000 200,000

169,000

95,000 93,000

100,000

0 -29,000

-22,000

-100,000

-200,000 -189,000 -214,000

-194,000

-300,000

-400,000

-500,000

-502,000

-600,000 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 Downtown

Beltline

Suburban North

Suburban South

Overall

the specific area of city sections later in this report. However, it is important to note that assessments for office properties are seeing a divergence. Average assessments have decreased slightly over the last three months in the Downtown and Beltline office markets, while the suburban office markets have seen slight increases in average assessments. The 2018 tax rates will be released in April, which is when further adjustments to taxes and operating costs are anticipated. Due to the high levels of vacancy in the central areas of Calgary, the tax burden has seen some shifting to suburban properties. There was one new building completed in first quarter 2018, 14th Street Office Building at 1506 – 11th Avenue SW (38,000 sf ), which was 73% leased at the time of completion. Approximately 700,000 sf of new office space, in five buildings, remains under construction across Calgary, with 56% pre-leasing in place. The majority of this is in Downtown (66%), followed by the Suburban North (26%), Suburban South (4%), and Beltline (4%). Very little new construction is anticipated to be announced in the city for several years, AVISON YOUNG Q1 2018 - Office Market Report

calgary overall continued from page 3

given the widespread availability across the entire Calgary office market. 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 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. 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. This can already be seen with higher vacancy rates in lower-quality buildings.

An Avison Young Topical Report An Avison Young Topical Report

An Avison Young Topical Report Union vs. non-union labor APRIL 2018

While costs can vary depending on the location and scope, it is estimated that building with union labor can have a 20%-30% effect on costs, but using union labor is sometimes necessary due to local codes and/or practices.

Parking Parking is a more important factor in suburban areas, but even projects in cities often have some form of parking, especially residential projects.

Brooklyn Bridge

Converted Warehouse Source: Unsplash.com

Transit lines and TOD Many of the adaptive reuse projects in urban areas have

Mechanical systemsresidential communities is sought-after by communities, andexisting corporations alike. In most adaptive reuse residents projects, the mechanical systems (electric, heating ventilation, air-conditioning To date, the projects that have been completed on Long Island plumbing, etc.) will likely be upgraded to serve the new are almost too numerous to count. These projects have areaintended use. wide benefits to employees, residents and the entire community. Dumbo, Brooklyn

Technology

Source: Shutterstock.com

around lines – i.e., trains, buses, subways, etc. Perhaps the best example of this trend in thedeveloped New York area is transit Benefits of adaptive reuse projects Based onisthe the borough-wide transformation of Brooklyn, which stillincreasing going desire of today’s workforce, a finished Adaptive reuse projects offerpoint many advantages to communities, project’sdemand proximityforto transit is often a major selling when strong as of this report. On Long Island, the growing occupants and developers. Utilizing existing structures developers are trying toresidents, attract tenants and buyers. live-work-play lifestyles has triggered the transformation of an with character and historical significance often paves the way for area long utilized for industrial, manufacturing and distribution an area-wide renaissance. Developers are able to recycle, or into retail and multi-residential properties. breathe new life into, an otherwise old and obsolete structure. Today, the integration of office space, retail services and vibrant Although projects sometimes require creativity, imagination and patience, the many benefits include: •

Revitalization of blighted areas;

•

Lower impact on the environment due to public transportation and shorter commutes, which can include biking and walking to work;

Shutterstock.com These mixed-use projects provide a live-work-play environment, Source: • Preservation of a city’s identity and cultural and historical

which offers not only convenience and amenities, but an Today’s technology is moving at a fast pace. New projects will

friendly footprint on the community. Adaptive Reuse –environmentally What’s Old is New needProjects wireless connectivity, and many of the new LEED projects Again

significance;

•

According to thecomputerized Commercial Observer, will advance things a step further with energy- in the Long Island

management systems. neighborhood of Bushwick, industrial buildings are experiencing Table of Contents “a second life as bars, theaters, music venues, specialty gyms and

•

Combined acquisition and redevelopment costs typically fall below replacement costs in certain markets offering financial incentives to complete these projects; Ability to capitalize on locations that cannot be redeveloped,

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. . . . . . . . . . . . p. 2 such as waterfront or parkside spaces; just about anything boutique or hipster-approved.” This trend Incentives

• Incentives often offered by local and state governments make enticed investors and developers Many municipalities willhas offer incentives, especially in areas to capitalize on the new Benefits of Adaptive Reuse . . . . . . . area-wide . . and . . . . increased . . . .transformation. . . . . . demand. . . . . . . . . .While . . . . . slightly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 3 projects more financially viable; thatProjects are undergoing •

more complicated, incentives such as tax credits and lower

Ability to achieve LEED status through construction with

Adaptive Reuse Takes Over Queens .sometimes . . . . . . . . . .make . . . . . a. .project . . . . . . .viable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 4 green materials and techniques; easier commuting patterns. entitlements Denver is building 119 miles of light rail and 70 new stations in a decade.

History of Adaptive Reuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 5 Source: Shutterstock.com

Introducing Avison Young's Latest Topical Report:

Adaptive Reuse Projects What's Old is New Again VIEW OR DOWNLOAD REPORT HERE

Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 6

Partnership. Performance. 3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 9 Partnership. Performance. 8

1

FOCUS on Investment The start of 2018 has seen a continuation of the narrative witnessed throughout 2017 where value add office plays and core office investments continue to be top of mind for active participants in our market. A listing at 1120 – 68 Avenue NE, one that Avison Young represents, saw two rounds of bids for a newer-vintage, 90,133 sf office building. There are a number of market participants willing to aggressively pursue quality office assets even with (and because of ) substantial near-term leasing risk. Another recent transaction, Intrinsic Group’s purchase of the Wi-Lan Building, commonly referred to as the Yellow Pages Building, is a unique example of an office real estate investment that takes advantage of negative market sentiment allowing a purchaser to buy a best-in-class building at a substantial discount to replacement costs.


Calgary Q1 2018 Office Construction calgary q1 2018 under construction and new supplySummary Downtown Under Construction Building Name TELUS Sky

Address 110 - 7th Avenue SW

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

Building Name Mount Royal West

Address 1508 - 8th Street SW

Building Name 14th Street Office (RECA Building)

Address 1506 - 11th Avenue SW

% Leased / Pre-Leased 39%

LEED Target Platinum


LEED Target


LEED Target

% Leased / Pre-Leased 100% 35%

LEED Target


LEED Target

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

Beltline New Supply Office Area (sf) Expected Completion 36,000 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


Office Area (sf) Expected Completion 31,000 Q3 2018

4

Downtown Downtown

DOWNTOWN CALGARY 5 YEAR AND 10 YEAR AVERAGE ANNUAL ABSORPTION Downtown Calgary 5-Year and 10-Year Average Annual Absorption 3,000,000 2,407,000

ABSORPTION (DEMAND)

VACANCY (SUPPLY)

RENTAL RATES

The Downtown Calgary office market saw vacancy decrease to its lowest level since this time last year. Downtown Calgary office vacancy, as of first quarter 2018 is 25.6%. This is down from 26.0% in fourth quarter 2017, but up from 24.0% 12 months ago in first quarter 2017. Total vacancy for the Downtown office market is 11.7 msf, broken down by: 8.6 msf of headlease space (74%) and 3.1 msf of sublease space (26%). 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. First quarter 2018 saw the return to positive absorption for class AA and C buildings. Over the last three months, class AA buildings saw positive 368,000 sf of absorption, class A saw negative (-157,000 sf ) of absorption, class B downtown calgary office vacancy rates

Downtown Calgary Office Vacancy Rates 35%

32.4% 3.28%

30%

25.6% 25%

25.6%

0.64%

24.0%

22.9% 6.75%

20%

6.65%

10.08%

15%

29.16% 24.98%

10%

18.84% 16.29% 13.92%

5%

0%

Class AA

Class A

Headlease Vacancy

Headlease Vacancy

5

Class B

Class C

Sublease Vacancy


Sublease Vacancy

2,088,000 2,000,000

10-Year Annual Average Absorption -162,000 sf per year 1,000,000 560,000

557,000

376,000 169,000 0 -189,000

-786,000

-1,000,000

-1,360,000 -2,000,000 -2,205,000

5-Year Annual Average Absorption -1,289,000 sf per year -3,000,000 -3,068,000

-4,000,000 2008

2009

2010

2011

2012

saw negative (-52,000 sf ) of absorption, and class C saw positive 10,000 sf of absorption. Vacancy by class is now: class AA –24.0%, class A – 22.9%, class B – 32.4%, and class C – 25.6%. All indicators point to Calgary’s Downtown office market having found peak vacancy for this cycle. Absorption in the Downtown office market for first quarter 2018 was positive 169,000 sf. Over the last 12 months downtown Calgary has a cumulative negative absorption of (-23,000 sf ). This is a noticeable improvement over the negative (-3.1 msf ) of absorption recorded in 2015, negative (-2.2 msf ) of absorption recorded in 2016, and negative (-189,000 sf ) of absorption recorded in 2017. Thanks to the extreme nature of the downturn over the last three 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). For reference, the annual absorption in 2014 was 376,000 sf, and negative (-1.4 msf ) in 2013. Average asking rents for headlease space in Downtown range between $4 and $36 per

2013

2014

2015

2016

2017

2018

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 $20.71 psf for all building classes, in the Downtown market. Class AA buildings average $23.28 psf, class A buildings average $20.56 psf, class B buildings average $17.46 psf, and class C buildings average $15.56 psf. There is currently downward pressure on assessments for downtown office properties, potentially resulting in further declines in taxes and operating costs. This is a direct result of the weak economy and high vacancy rates.


Downtown continued from page 5

There are 15 availabilities on the market in Downtown Calgary that have over 100,000 sf available as one contiguous block. These 15 blocks of space represent 26% of the total availability of space in the Downtown market and 65% of this space is available on a headlease basis.

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

Looking to the future, without a substantial change in the Calgary economy, TELUS Sky will potentially push vacancy up to 27%, using pessimistic assumptions. The current realistic prediction is that absorption will be flat for the second quarter 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%. Even with the addition of one more building in a year’s time, vacancy is forecasted to rise to 25.9%, remaining below the peak value recorded in 2017.

$35.00

$35.00

$30.00

Brookfield Place Calgary – East was added to inventory in second quarter 2017. This 1.4 msf office tower is 79% preleased, and first quarter 2018 saw the first of the occupancy for the building with Scotiabank being phased in. This one building increased the downtown office inventory by 3%.

$25.00

$24.00

$20.00

$15.00

$15.00

$10.00

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% pre-leased - with approximately a year to go before occupancy starts to take place. As a result of the current economic conditions and weak demand for space

$9.00 $6.00

$5.00

$0.00 New Construction

Class AA

Range

Class A

Class B

Class C

you can now follow the avison young | calgary office on twitter

Average

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

REASONABLE ASSUMPTIONS:

30%

26.4% 25%

25.7% 26.0% 25.6% 25.8%

26.0%

27.0%27.0%27.0%27.0%27.0% 26.9% 26.8%

25.6%25.6% 25.4% 25.9% 25.6% 25.2%

23.9%23.9% 22.9%

24.9% 24.6%

24.3% 23.9%

21.1%

26.5% 26.3%

23.6% 23.3%

20% 17.6%

0% Q1

Q2

Q3

2014

Q4

Q1

Q2

Q3

2015

Q1

Q2

Q3

Q4

Q1

2016 Vacancy Rate - Reasonable Assumptions

Vacancy Rate - Reasonable Assumptions


Q2

2019: Flat absorption TELUS Sky (460,000 sf)

Q4

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

5%

707 Fifth (564,000 sf)

6.1% 6.2% 6.2%

Calgary City Centre (853,000 sf)

7.2%

Eau Claire Tower (613,000 sf)

12.2%

9.1%

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

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

15%

10%

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

PESSIMISTIC ASSUMPTIONS:

16.3%

10.7%

no new development is expected to be announced in Calgary’s downtown core for several years.

Q3

2017

Q4

Q1

Q2

Q3

2018

Q4

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 18.5% in first quarter 2018. This is up from 17.4% in fourth quarter 2017, and from 16.4% 12 months ago in first quarter 2017. The current vacancy also remains below the peak of 19.1% recorded in third quarter 2016. beltlilne calgary office vacancy by class Beltline Calgary Office Vacancy Rates 25%

22.2%

20%

4.71%

18.5%

15.9% 15.0%

15%

5.41%

0.22%

sf ) of absorption, class B saw positive 20,000 sf of absorption, and class C saw positive 4,000 sf of absorption. Vacancy by class is now: class A – 15.9%, class B – 22.2%, and class C – 15.0%. Absorption in the Beltline office market for first quarter 2018 was negative (-29,000 sf ). 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. For the second time during this downturn cycle, a long-standing office building is working its way towards being converted into a residential property. The Stephenson Building (1177 – 11th Avenue SW) is a 62,000sf, seven-storey, class B office building owned by Strategic Group. Avison Young has removed this property from the inventory of office properties, as space is no longer being actively marketed for lease.

Total vacancy for the Beltline office market is 1.5 msf, broken down by: 1,0840,000 sf of headlease space (71%) and 449,000 sf of sublease space (29%).

Average asking rents for headlease space in the Beltline range between $5 and $26 per square foot, per annum. Class A buildings typically range between $18 and $26 psf (average $22 psf ). Class B buildings typically range between $12 and $16 psf (average $14 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.

Looking at the breakdown between building classes, first quarter 2018 saw negative absorption for class A buildings and positive absorption for class B and C buildings. Over the last three months class A buildings saw negative (-53,000

Similarly, quoted taxes and operating costs average $18.04 psf for all building classes, in the Beltline market. Class A buildings average $19.60 psf, class B buildings average $17.27 psf, and class C buildings average $16.23 psf.

8.72% 10% 17.46% 14.76% 13.07% 5% 7.21%

0% Class A

Class B

Headlease Vacancy Headlease Vacancy

7

Class C Sublease Vacancy Sublease

Overall Total Vacancy Vacancy

beltline calgary annual office absorption

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

800,000

600,000

400,000

200,000

16,000

0

-29,000

-80,000

-200,000 -214,000

-400,000 2014

2015

2016

2017

2018

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 37% of this space is available on a headlease basis.

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 Q1 2018 Office Market Statistics

DOWNLOAD CHART HERE


BELTLINE beltline calgary office market average asking rents


Beltline Office Market Average Asking Rents

No new projects commenced in first quarter 2018. One project, 14th Street Office Building at 1506 – 11th Avenue SW (36,000 sf ) was completed, with 73% pre-leasing in place. One project, Mount Royal West, remains under construction and as of first quarter 2018 is fully leased.

Headlease - High-Low-Average - ($/SF/Annum) $30.00

$25.00

$22.00 $20.00

$15.00

Want to know more about Calgary's new $100 Million Economic Development Investment Fund (EDIF)? Overview from Calgary Economic Development CLICK HERE City of Calgary Fund Governance and Terms of Reference CLICK HERE

$14.00

$10.00

$10.00

$5.00

$0.00 Class A

Class B

Range

Class C

Calgary's Unemployment Rate is now 8.2%. 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 March 2018, prepared by Avison Young's Calgary Research team (monthover-month and year-over year comparisons).

CLICK HERE to view

Average

Calgary Q1 2018 Leasing calgaryNotable q1 2018 notableOffice office leasing transactionsTransactions Downtown Tenant

Building Name

Address

Size (sf)

Deal Type

Alberta Infrastructure

Century Park Place

855 - 8th Avenue SW

48,000

Headlease

Baker Hughes*

Gulf Canada Square

401 - 9th Avenue SW

47,000

Headlease

Nuvista Energy

Eighth Avenue Place - East

525 - 8th Avenue SW

37,000

Headlease

CGG Services*

Gulf Canada Square

401 - 9th Avenue SW

35,000

Sublease

Beltline Copeman Healthcare*

Tenant

Building Name Mount Royal West

Address 1508 - 8th Street SW

Size (sf) 28,000

Deal Type Headlease

Katz Group Real Estate*

Joffre Place

708 - 11th Avenue SW

6,500

Headlease

Tara D. Pipella Professional Corp.*

Dorchester Square

13323 - 8th Street SW

6,300

Headlease

Suburban North Tenant

Building Name

Address

Size (sf)

Deal Type

General Dynamics*

1020 - 68th Avenue NE


148,000

Headlease

Platifab

Yellow Pages Building

2891 Sunridge Way NE

16,000

Headlease

Health Sciences Association of Alberta*

Harvest Hills Office Park A


12,500

Headlease

Suburban South Tenant

Building Name

Address

Size (sf)

Deal Type

Rockwell Automation

Fountain Court 3

709 - 64th Avenue SE

25,000

Headlease

Masuch-Albert LLP

Blackfoot Point 4

8820 Blackfoot Trail SE

16,000

Headlease

Zephyr Sleep Technologies

Blackfoot Point 2

8826 Blackfoot Trail SE

8,500

Headlease

* Indicates transactions Avison Young was involved in AVISON YOUNG Q1 2018 - Office Market Report

8

suburban Suburban North

suburban north calgary annual office absorption Suburban North Calgary Annual Office Absorption 150,000

127,000

ABSORPTION (DEMAND)

VACANCY (SUPPLY)

RENTAL RATES

100,000 68,000

The Suburban North office vacancy rate increased to 17.7% in first quarter 2018, up from 17.5% in fourth quarter 2017, but down from 19.0% 12 months ago. Vacancy appears to have peaked during this downturn for this market segment at 21.3% in the third quarter of 2016. Looking at the quadrants themselves, vacancy for the Suburban Northeast is 16.9%, while the vacancy for the Suburban Northwest is 19.8%. Meanwhile the overall suburban office vacancy rate is 19.9%.

50,000

0 -14,000

-22,000

-50,000

-100,000

-150,000

-200,000

-194,000

-250,000 2014

2015

2016

2017

2018

suburban north calgary office vacancy by class Suburban North Calgary Office Vacancy Rates 25%

20.0%

20%

0.61%

18.4%

17.7%

3.25% 3.34%

15.0%

15%

5.01%

10%

19.37%

15.13%

5%

14.34%

10.03%

0% Class A

Class B

Headlease Vacancy Headlease Vacancy

Class C

Overall

Sublease Vacancy

Total Vacancy Sublease Vacancy

Headlease space increased by 35,000 sf, while sublease space decreased by 13,000 sf during the last three months. Total vacancy for the Suburban North office market is 1.8 msf, broken down by 1.4 msf of headlease space (81%) and 331,000 sf of sublease space (19%).

First quarter 2018 saw positive absorption for class A buildings, and negative absorption for class B and C buildings in the Suburban North. Over the last three months class A buildings saw positive 13,000 sf of absorption, class B saw negative (-14,000 sf ) of absorption, and class C saw negative (-21,000 sf ) of absorption. Vacancy by class is now: class A – 18.4%, class B – 15.0%, and class C – 20.0%. Absorption in the Suburban North office market for first quarter 2018 was negative (-22,000 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 absorption is 28,000 sf per year. 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 $15 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. Similarly, quoted taxes and operating costs average $14.52 psf for all building classes, in the Suburban North market. Class A buildings average $15.38 psf, class B buildings average $13.95 psf, and class C buildings average $12.19 psf. There are 14 availabilities in Suburban North Calgary with more than 30,000 sf available in one contiguous block. These 14 blocks of space represent 43% of the total availability of space in the Suburban North office market and 78% of this space is available on a headlease basis. No new office buildings were added to inventory in first quarter 2018 in the Suburban North office market. Two office buildings remain under construction in Suburban North Calgary. These are: Hexagon Calgary Campus, and One North Business Centre. They represent 181,000 sf of new space, which will increase the Suburban North office inventory by 2%.

calgary office market average taxes and operating costs

Average Taxes & Operating Costs Downtown Beltline Suburban North Suburban South Overall

Class AA $23.28 $23.28

Class A $20.56 $19.60 $15.38 $15.01 $18.58

Class B $17.46 $17.27 $13.95 $14.64 $16.72

Class C All Classes $15.56 $20.71 $16.23 $18.04 $12.19 $14.52 $10.48 $14.57 $14.23 $17.59

(per square foot, per annum)

9


suburban suburban north office market average asking rents

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

$30.00

Headlease space increased by 84,000 sf over the last quarter, while sublease space decreased by 179,000 sf. Total vacancy for the Suburban South office market is 2.6 msf, broken down by 1.93 msf of headlease space (73%) and 700,000 sf of sublease space (27%).

$27.00 $25.00

$20.00

$19.00

$15.00

$13.00 $10.00

$9.00

$5.00


Class A

Range

Southeast is 23.2%, while the vacancy for the Suburban Southwest is 18.7%. Meanwhile the overall suburban office vacancy rate is 19.9%.

Class B

Class C

First quarter 2018 saw positive absorption for all classes of buildings in the Suburban South office market. Over the last three months class A buildings saw positive 52,000 sf of absorption, class B saw positive 36,000 sf of absorption, and class C saw positive

Average

1,355,000

1,000,000

500,000

95,000

93,000

2017

2018

0 -141,000

-500,000 -538,000

2014

2015

2016

Suburban South Calgary Office Vacancy Rates


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.

30%

25%

average absorption is 109,000 sf per year, and the 10-year annual average absorption is 257,000 sf per year.

25.1%

21.8% 7.66% 20% 5.81%

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15%

11.8% 0.00%

12.0% 0.65%

10%

Suburban South

17.42%

16.00% 11.84%

11.36%

Class B

Class C

5%

VACANCY (SUPPLY)

Suburban South Calgary Annual Office Absorption 1,500,000

-1,000,000

suburban south calgary office vacancy by class

ABSORPTION (DEMAND)

suburban south calgary annual office absorption

RENTAL RATES 0%

The Suburban South office vacancy rate decreased to 21.8% in first quarter 2018, down from 22.6% in fourth quarter 2017, and from 24.3% twelve months ago in first quarter 2017. Vacancy appears to have peaked during this downturn for this market segment at 24.3% in the first quarter of 2017. Looking at the quadrants themselves, vacancy for the Suburban AVISON YOUNG Q1 2018 - Office Market Report

Class A

Headlease Vacancy

Headlease Vacancy

Sublease Vacancy


Sublease Vacancy

6,000 sf of absorption. Vacancy by class is now: class A – 25.1%, class B – 11.8%, and class C – 12.0%. Absorption in the Suburban South office market for first quarter 2018 was positive 93,000 sf. The 5-year annual

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 $23 psf, (average $19 psf ). Class B buildings typically range between $10 and $15 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 $14.57 psf for all building classes, in the Suburban South market. Class A buildings average $15.01 psf,

10

suburban SUBURBAN NORTH office vacancy by location Suburban North Office Vacancy by Location

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

25%

$35.00

20%

17.7%

$25.00

16.9%

15.5%

3.3%

15.0%

15%

2.9%

17.3%

3.2%

$27.00

19.8%

0.6%

18.4%

$30.00

21.1% 0.4%

20.0%

14.8%

3.5%

5.0%

1.6%

3.7% 5.0%

10%

$20.00

24.3% 20.7%

19.4%

$19.00

16.9%

15.1%

14.3%

5%

$14.00

4.9%

13.4%

12.3%

11.8%

$15.00

9.4%

13.2%

10.0%

4.5%

$10.00

$10.00

0% Class A

Class B

Class C

Overall

Class A

Class B

Suburban North 9.9 msf

$5.00

Class C

Overall

Class A

Class B

NE 7.3 msf (74%)

Headlease Vacancy

Class C

Overall

NW 2.6 msf (26%)

Sublease Vacancy

Headlease Vacancy

Sublease Vacancy


Class A

Range

Class B

Class C

SUBURBAN SOUTH office vacancy by location Suburban South Office Vacancy by Location

Average 30%

26.6%

25%

23.2% 21.8%

21.3%

10.3%

1.1%

City of Calgary

8.0%

0.8%

Balzac

14.4%

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0.8%

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144 Ave. N.W.

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14.7% 0.0%

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No new buildings were added to inventory in first quarter 2018. 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 53% preleased. Given the current, widespread availability in the office market and slow absorption of space, limited new construction is anticipated to commence in 2018.

15%

Range Road 14

772

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 63% of the total availability of space in the Suburban South office market and 67% of this space is available on a headlease basis.

To Airdrie, Red and Edmont

18.7%

566

4 St. S.W.

5.8%

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7.7%

20%

10 St. N.W.

class B buildings average $14.64 psf, and class C buildings average $10.48 psf.

25.1%

Dr.


76 Ave.

61 Ave

72

featured downtown Fina Building

featured beltline BROCHURE

RECA Building

736 - 8th Avenue SW HEADLEASE Opportunity From 1,897 sf up to 13,649 sf

Hanover Place

1506 - 11th Avenue SW HEADLEASE Opportunity 3,453 sf

BROCHURE

101 - 6th Avenue SW HEADLEASE Opportunity From 997 sf up to 222,662 sf

Gulf Canada Square

BROCHURE

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

featured suburban south

featured suburban north Centre 810

BROCHURE

BROCHURE

1212 - 58th Avenue SE

BROCHURE

Avison Young Calgary Office Team Taylor Archer

Jordyn Malkinson

[email protected]

[email protected]

Loveleen Bhatti

Miri Mammadov

[email protected]

[email protected]

Roseleen Bhatti

Paul McKay

[email protected]

[email protected]

Rachel Carter

Alexi Olcheski

[email protected]

[email protected]

Eric Demaere

Nairn Rodger

[email protected]

[email protected]

Spencer Duff

Kirsten Scott

[email protected]

[email protected]

Steve Goertz

Glenn Simpson

[email protected]

[email protected]

Larry Gurtler

Anna Sorensen

[email protected]

[email protected]

Eric Horne

Mark St. Pierre

[email protected]

[email protected]

Chris Howard

Todd Throndson

[email protected]

[email protected]

Jason Kopchia

Alex Wong

[email protected]

[email protected]

Tinyan Leung

Allan Zivot

[email protected]

[email protected]

Business Condominium Team Pali Bedi [email protected]

7777 - 10th Street NE SUBLEASE Opportunity 3,634 sf

HEADLEASE Opportunity From 1,700 sf up to 11,711 sf

Fred Clemens [email protected]

Puneet Nagpal [email protected]

325 Manning Road NE

BROCHURE

Snowdon Block

BROCHURE

For more information, please contact:

Research Susan Thompson | 403.232.4344 [email protected]

Graphics 325 Manning Road NE HEADLEASE Opportunity From ±1,000 sf - ±18,107 sf

2010 - 11th Street SE HEADLEASE Opportunity From 1,369 sf up to 2,840 sf

Penelope Johnson [email protected]

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.

