Empty Floors, Shadow Vacancies New Norm for Calgary Tower Owners


Office-tower owners in Canada’s energy hub are about to feel the full force of the oil-price crash.

Vacancy is already at a five-year high in Calgary and rents are the lowest since 2006 after thousands of office jobs were cut. Energy company tenants have now begun to ask for rental relief and are offering subleases for as little as half the going rate, according to real estate brokers including Jones Lang LaSalle Inc. and Avison Young Canada Inc.

That’s before five new office towers with about 3.8 million square feet (353,031 square meters) of space hits the market in the next three years.

“It is a bloodbath,” said Alexi Olcheski, an office-leasing principal at Avison Young from his office in downtown Calgary. “We’re at the highest point of fear and uncertainty now.”

Caught in the downturn are tower owners including Dream Office REIT, Artis REIT, and Morguard Corp., whose shares have dropped about 27 percent, 14 percent and 5.1 percent respectively over the past 12 months. The Standard & Poor’s/TSX Capped REIT Index is down 8.7 percent over the same period compared with a 8.2 percent drop in the broad S&P/TSX Composite Index. U.S. crude has dropped more than half since its peak in June 2014 to hover around $45 a barrel.

In downtown Calgary, the vacancy rate jumped to 14 percent in the third quarter, the highest since 2010 and compared with 5 percent for downtown Toronto, according to CBRE Group Inc. Companies are subleasing a record 2.7 million square feet, the brokerage said. That doesn’t include as much as 2 million square feet of so-called “shadow vacancy” or space leased but sitting empty, which would push vacancy to 16 percent, the most since the mid-1980s.


Penn West Plaza, owned by developer Morguard, is among the buildings with empty floors. About 38 percent of its 621,628 square feet of office space is on the market for sublease, according to leasing documents. The going rate for the penthouse of the West tower is “negotiable” while occupancy is “immediate” for other floors, according to the ads. Morguard didn’t return phone calls and e-mails seeking comment.


Employment at Penn West Petroleum Ltd. shrank to less than 800 workers this year from about 2,250 three years ago. Athabasca Oil Corp., which eliminated more than 25 percent of its workforce last month, has been subleasing from Penn West and is also trying to find tenants to take some space off its hands, according to listings.

Penn West declined to comment, while a spokesman for Athabasca didn’t have an immediate comment when reached by e-mail.

Even Calgary’s most iconic tower, completed just a few years ago, isn’t immune. The 58-story Bow, Canada’s second- largest office building at 2.0 million square feet, is owned by H&R REIT and leased until 2038 to Encana Corp., the real estate firm’s largest tenant by revenue. Encana subleases 1 million square feet to Cenovus Energy Inc., which in turn aims to vacate and sublease half of that, according to Reg Curren, a Cenovus spokesman. Together, the firms cut about 1,500 jobs this year, part of the 36,000 job losses at energy companies across Canada since the oil rout began.


“We are in the best position to ride through this storm.,” Larry Froom, H&R REIT’s chief financial officer, said in an e- mail. Most of the leases on the company’s five offices in Calgary expire after 2021, he said. The only way for tenants to get out of a lease agreement is through bankruptcy, unlikely for the company’s investment-grade tenants, he said.

“Calgary exposure is the biggest source of forecast risk,” Heather Kirk, analyst at Bank of Montreal, said in a research note Tuesday. There’s “an increasing likelihood of downward earnings revisions in Western portfolios,” she said.

Subleasing is in overdrive and has helped buffer landlords from the impact of the oil slump. Avison Young’s Olcheski said he made his first quadruple sublease earlier this year, when a technology firm rented space from a company several leases removed from the main energy tenant.

But the subleases are being done at as little as 50 percent of the original cost, according to Damien Mills, executive vice president and managing director of Western Canada for JLL. Rents have dropped to C$20.75 a square foot in downtown Calgary, the lowest since at least 2006, according to the brokerage.


“Landlords now are forced to compete with somebody that’s looking for a very different return on their real estate cost,” Mills said.

Some owners are already feeling the pain. Two-thirds of Dream Office’s space in Calgary expires in the years up to 2019 and only 13 percent has been picked up, according to company documents.

“With a smaller tenant size relative to most landlords, we believe this reduces leasing rollover risk as these tenants tend to be leaner, resulting in less headcount reductions during an economic downturn,” Rajeev Viswanathan, chief financial officer of Dream Office, said by e-mail. The company is also aggressively pursuing smaller tenants, he said.

Artis REIT, which has 20 office buildings in Calgary with tenants including power generator TransAlta Corp., has about 823,000 square feet coming up for renewal between 2016 and 2018, or 13 percent of its total office portfolio, according to company documents. The occupancy of its towers in the city has fallen to 86 percent from 96 percent last year, financial filings show. The company wrote down the fair value of its properties by C$65 million in the third quarter after it lowered Calgary rents. Artis executives didn’t respond to requests seeking comment.


In addition to the current glut of space, five office towers — each with at least 430,000 square feet — are due for completion in the next three years in Calgary, some only 36 percent leased as of October.

Olcheski, who’s worked in Calgary for about 10 years, is trying to remain optimistic amid the uncertainty. It’s going to be his best year yet for leases to smaller, non-energy tenants, for example.

“God only knows what’ll happen if oil doesn’t rebound,” he said. “I try not to let that penetrate my mind.”







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