The Office Report Calgary Market Q1 2015 The first quarter of 2015 saw a major downturn in Calgary s commercial office market. Oil prices remained at levels less than half of 2014 highs and oil storage capacity steadily decreased, making market conditions increasingly difficult for energy companies. With energy stock prices falling further from December closing prices, diminished growth expectations further motivated large tenants to employ various defensive strategies; cancelling or deferring capital expenditures, laying off staff and placing their unused space on the sublease market to reduce expenses. This led to a dramatic second consecutive quarter of overall negative absorption and a further increase in vacancy. Many prospective tenants remained on the sidelines as the effects of the current low oil price environment began to move rental rates in their favour. It is anticipated the current environment will be conducive to merger and acquisition activity, which will lead to additional available sublease space as we move into the second and third quarters of 2015. Noteworthy on this point are the Baker Hughes/Halliburton and Repsol/Talisman mergers which are expected to be approved mid-year. These corporate announcements will likely have dramatic implications for the sublease market. However, opportunities will be created, for well-positioned smaller companies to acquire higher-quality space at attractive rates among the AA and A Class sublease spaces on the market. The first three months of 2015 have been indicative of the direction the Calgary market is likely to take in the short term, though it is anticipated that the negative absorption witnessed in the first quarter may represent the worst of what is to come. Regarding Calgary s downtown market, demand for office space is expected to remain cool through the second quarter. If oil prices stabilize in the lower $50 per barrel range and remain there into the third or fourth quarters, 2015 will be a challenging year as demand will continue to slow and sublease availability will increase. Calgary Q1 2015 Office Construction Summary Class AA A Class Building District Office Area (sf) Expected % Leased/ completion re-leased LEED Target Calgary City Centre Downtown 820,000 Q4 2015 81% Gold Eau Claire Tower Downtown 615,000 2017 75% Gold 707 Fifth Street Downtown 564,000 Q2 2017 45% Gold Telus Sky Downtown 460,000 Q1 2018 50% latinum Brookfield lace Calgary - East Downtown 1,400,000 2018 71% Gold lace 10 - East Tower Beltline 316,500 Q2 2017 0% Silver Corus Block Suburban South 18,400 Q2 2015 100% Fountain Court Building I Suburban South 24,406 Q2 2015 19% Fountain Court Building II Suburban South 36,544 Q2 2015 0% Fountain Court Building III Suburban South 29,546 TBD 0% Seton rofessional Centre - East Building Suburban South 43,700 Q2 2016 90% Seton rofessional Centre - West Building Suburban South 53,200 Q2 2016 31% Quarry Crossing A Suburban South 160,600 Q2 2015 30% Gold Quarry Crossing B Suburban South 162,000 Q4 2015 0% Gold Imperial Oil Campus - hase II Suburban South 631,000 Q2 2016 100% Gold The Odeon Suburban South 38,000 Q2 2016 40% Arcuri Business Centre Suburban North 27,000 Q2 2015 0% Crowfoot 75 Suburban North 51,800 Q3 2015 0% LEED Shadow Meredith Block Suburban North 161,000 Q3 2015 15% Gold Computer Modelling Group (CMG) Building Suburban North 90,000 Q2 2017 100% Calgary Q1 2015 Office Completion Summary Building District Office Area (sf) Completion % Leased LEED Target A 11th Avenue lace Beltline 198,000 Q1 2015 60% Gold Calgary Overall - Vacancy 10.2% Within the Calgary market there was 4.8 million square feet (msf ) of headlease office space available for tenants, out of a city-wide inventory of 70 msf. This represents an increase of approximately 600,000 square feet (sf ) from fourth quarter of 2014. Sublease space adds a further 2.3 msf of space, up approximately 400,000 sf from fourth quarter 2014. Absorption for the overall city in the first quarter of 2015 was negative 1 msf, with the artnership. erformance. Avison Young The Office Report - Calgary Market Q1 2015 1
Downtown at negative 805,000 sf and the Beltline at negative 35,000 sf. The Suburban North market posted absorption of negative 13,000 sf, and Suburban South absorption was negative 175,000 sf. Overall vacancy within Calgary s office leasing market rose in the first quarter of 2015, reaching 10.2%. This takes into account all space available for occupancy within a six month period to calculate vacancy. Using this method, we see 449,000 sf of headlease space and 468,000 sf of sublease space in existing buildings coming available between April 1stand September 30th, 2015. With respect to rental rates, a slight decrease occurred during the first quarter of 2015. As additional space becomes available over the coming quarters, additional downward pressure will be placed on rates across the Downtown and Beltline markets. Tenants may take advantage of the situation and try to upgrade their space. There are currently 21 office buildings under construction in Calgary, containing approximately 5.7 msf of office space. Of the 1.5 msf sf of office space remaining for delivery in 2015, 602,000 sf remains available for lease. Approximately 68% of future Downtown inventory has been pre-leased and 48% of upcoming Beltline and Suburban inventory is pre-leased. Multiple projects are being built on a speculative basis, displaying developers long-term confidence in the Calgary Market. Of note in this regard are Crowfoot 75 (Telsec), Fountain Court (Centron), Meredith Block (Remington), lace 10 (Centron) and Quarry Crossing A and B (Remington). Downtown - Vacancy 9.1% The first quarter of 2015 saw the vacancy rate rise to 9.1%, up significantly from 7.2% in fourth quarter of 2014, and up from 6.1% one year prior. Looking at specific building classes, class AA space had a vacancy rate of 3.5%, class A was at 9.5%, class B at 15.4%, and class C had a vacancy rate of 10.7%. Market uncertainties surrounding the continued slide in oil prices resulted in 805,000 sf of negative absorption and have reinforced a wait-and-see approach, which is being taken by many tenants whose leases expire over the next 24 months. It should be noted that a significant contributor to this number is 150 9th Avenue SW, formerly Encana lace, which was purchased by Aspen roperties in February, 2015. Half of this building, equaling approximately 284,000 was immediately placed on the market for lease. In addition to this newly-marketed space, we continue to see large pockets of very attractive AA and A Class headlease space remain on the market for long periods of time. One example of this is Calgary lace I, in which multiple floors have been marketed since early 2014. Adding further to negative absorption has been larger companies making further moves to limit their exposure to the market, resulting in very large amounts of space being placed on the sublease market. With respect to Downtown office construction, the downtown core can expect nearly four million square feet of newly developed office space over the coming four years. Downtown projects include: 20.0% 15.0% 10.0% 5.0% 0.0% Historical 8.9% Forecast 634-6th Avenue SW (70,000 sf) Downtown Calgary Office Historical & rojected Market Supply Imperial Oil Lease Expiry: 759,000 sf 10.8% 10.3% Calgary City Centre (853,000 sf) 14.0% 12.6% 16.4% 14.1% 17.1% 17.3% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015 2016 2017 2018 12.5% Eau Claire Tower (613,000 sf) 707 5th Street SW (564,000 sf) 14.3% 19.8% 16.6% Brookfield lace - East (1,400,000 sf) Telus Sky (460,000 sf) 18.9% 15.5% Historical Vacancy Rate Absorption - Reasonable Assumptions 2015: Negative 1 msf at mid-year Negative 1.4 msf at year end 2016: Flat absorption to mid-year ositive 600,000 sf of absorption at year end 2017 & 2018: Return to 5 yr average quarterly absorption (257,000 sf) Absorption - essimistic Assumptions 2015: Negative 1.1 msf at mid-year Negative 1.8 msf at year end 2016: Negative 250,000 sf per quarter to mid-year Flat absorption to year end 2017 & 2018: ositive 200,000 sf of absorption per quarter artnership. erformance. Avison Young The Office Report - Calgary Market Q1 2015 2
Calgary City Centre is more than 80% pre-leased. Given the market environment, rogress Energy Ltd., exercised its option to take only 200,000 sf of the initial 350,000 sf set aside. This building is expected to be ready for tenant occupancy at the end of 2015 and when complete, will represent positive net absorption. The 27-storey 707 Fifth will contain 564,000 sf of office space when complete in mid-2017. This tower is being built by Manulife with Brion Energy being the lead tenant. The office portion of the 58-storey, 750,000 sf mixed-use Telus Sky tower remains 50% preleased. Completion is scheduled for late 2017. The core for the 1.4 million square foot (msf ) Brookfield lace Calgary tower had progressed to approximately four stories at the end of the first quarter. This tower will be the tallest in Calgary when completed in 2018. Cenovus has leased approximately 1,000,000 square feet in this project. The 25-storey, 613,000 sf Eau Claire Tower project by Oxford roperties remained 75% pre-leased as of the first quarter of 2015. This building will complete Oxford s Eau Claire lands redevelopment and is anticipated in 2017. Several large pockets of headlease space came available in the Downtown market, the largest of which was the aforementioned space in 150 9th Avenue SW which comprised 17 floors. In Calgary lace I, 137,000 sf remained available over 12 floors and a total of 107,000 sf remained available over five consecutive floors in Bankers Hall West. As to large pockets of sublease space, four consecutive floors could be found in B Centre totaling 95,000 sf and there were three full floors in enn West laza equaling 64,000 sf. Three contiguous floors totaling 59,000 sf were available in Devon Tower. Beltline - Vacancy 12.5% The Beltline vacancy rate increased to 12.5% for first quarter 2015, up from 12.1% in fourth quarter of 2014 and up from 10.6% recorded one year prior. The amount of available headlease space increased by 93,000 sf during the quarter, while available sublease space increased by 16,000 sf. Looking at the specific classes of buildings, class A had a vacancy of 14.8%, class B had a vacancy of 13.1%, and class C had a vacancy rate of 6.9%. During the first quarter of 2015, 643,000 sf of vacant headlease office space was available and a further 391,000 sf of sublease space was available out of a total inventory of 8.2 msf (111 buildings) in the Beltline market. Absorption over the first quarter of 2015 was negative 35,000 sf, a decrease from the negative 59,000 sf during the fourth quarter of 2014 and down from the negative 39,000 sf witnessed one year earlier. The completion of 11th Avenue lace, which is approximately 60% leased by Matrix Solutions, contributed positive absorption to this market. With 40% remaining vacant, this property represents the largest availability in the market. In 1216-10th Avenue SW, 47,000 sf of headlease space was available and in Atrium on 11th, multiple suites totaling 35,000 sf could be found. With respect to large pockets of sublease space, 35,000 sf could be found among three contiguous floors in Connaught Centre and 29,000 sf was available in the Hotel Arts Complex. In the second quarter of 2015, Avison Young anticipates 60,000 sf of high quality space entering the market in Keynote Tower and approximately 80,000 sf in TransAlta lace. With respect to the Beltline office construction, only one office buiding remains under construction. Centron Group is building the lace 10 - East Tower project on spec. Excavation for this 14-storey, 316,500 sf office building began during the second quarter of 2014. As of the first quarter of 2015, no pre-leasing activity had been completed. Delivery of this project is expected in mid-2017. Suburban North Vacancy 12.1 % Vacancy in the Suburban North market increased to 12.1% in the first quarter of 2015, up from 11.7% at the end of fourth quarter of 2014. Interestingly enough, this represents a return to the 12.1% vacancy witnessed 12 months ago. Vacancy in the Northwest was 16.6%, while the Northeast had a vacancy of 10.3%. Looking at specific building classes, class A space had a vacancy rate of 13%, class B had 12.3%, and class C had a vacancy rate of 9.5%. Over the first quarter of 2015 there was an 18,000 sf increase in available head lease space and a decrease of approximately 4,600 sf in available sublease space. Within the entire Suburban North market, 683,000 sf of head lease office space was available for tenancy, with the largest pockets being 63,000 sf in Cambrian Centre I East, 39,000 sf in Deerfoot Atrium South artnership. erformance. Avison Young The Office Report - Calgary Market Q1 2015 3
and 36,000 sf in 1111 49th Avenue NE. Sublease space adds a further 213,000 sf of space, with Deerfoot Atrium North containing three blocks of space totaling more than 74,000 sf. Absorption for the first quarter of 2015 was negative 13,000 sf, down from the positive 51,000 sf witnessed for the fourth quarter of 2014 but significantly less than the negative 105,000 sf witness one year prior. With respect to Suburban North office construction, three office developments are currently under construction, containing 260,000 sf of office space. Telsec remains on-track with their 52,000 sf Crowfoot 75 office project. Completion of this speculative project is expected in mid-2015. As of the first quarter of 2015, no leasing had been completed. Delivery of the two-storey, 27,000 sf Arcuri Business Centre development is expected during the second quarter of 2015. As of the first quarter of 2015, no leasing had been completed. Remington Development Corp. s Meredith Block project in Calgary s historic Bridgeland community is expected to come on-line during the third quarter of 2015. Approximately 15% of this seven-storey, 181,000 sf project has been pre-leased to IBI Group Inc. as of the first quarter of 2015. Remington Development Corp. is developing a new, 90,000 sf building for Computer Modelling Group, to be located in the University of Calgary s Research ark. Delivery is anticipated in mid-2017. Suburban South Vacancy 11% The vacancy rate for the Suburban South was 11% in the first quarter of 2015, up from 9.3% at the end of fourth quarter of 2014 but down from 12.1% one year prior. The Southwest quadrant had a vacancy rate of 11.1%, and the Southeast quadrant had a vacancy rate of 11%. Looking at specific building classes, class A space had a vacancy rate of 10.4%, class B had 10.6%, and class C had a vacancy rate of 15.1%. Within the Suburban South market there was a total of 1,035,000 sf of vacant headlease space available. This is up 54,000 sf from fourth quarter of 2014. The largest contiguous pocket available is in Southland ark II where 101,000 sf could be found among two suites. Another large option in the Suburban South was Sundance lace, where Strategic Group has placed a 172,000 sf building on the headlease market. Sublease space adds a further 325,000 sf of options. This is up 113,000 sf from the fourth quarter of 2014. More than 48,000 sf of sublease space could be found in Airstate Centre and 38,000 sf could be found in Quarry Central. Absorption for the first quarter of 2015 was negative 175,000 sf, a significant change from positive 110,000 sf in the fourth quarter of 2014 and up from negative 58,000 sf one year prior. The primary contributors to the overall weakness of this market were multiple floors placed on the market for sublease in the Golder Building totaling 71,000 sf and Railway Corporate Centre A where more than 32,000 sf of sublease space could be found. Eight office developments comprising 1.2 msf of office space are currently underway in the Suburban South market, with five expected to come on-line through 2015. The Corus Block development along 17th Avenue SW will be complete and available for tenancy in the second quarter of 2015. Fountain Court by Centron Group comprises three, two-storey office buildings located at the corner of Blackfoot Trail and Glenmore Trail. Building I is expected to be ready for tenant improvements in mid-2015. Completion of Building II is also anticipated in June 2015. Work on Building III is being put on-hold pending additional leasing activity in the first two buildings. artnership. erformance. Avison Young The Office Report - Calgary Market Q1 2015 page 4
The East & West buildings of Seton rofessional Centre are expected to be available for tenant fixturing in mid- 2016. These three-storey office buildings comprise approximately 97,000 sf of office space. Quarry Crossing A & B by Remington Development Corp. are located at the South West corner of Quarry ark Boulevard and 24th Street SE. Delivery of these two 161,000 sf office buildings is expected in the second quarter and fourth of 2015, respectively. Quarry Crossing A was approximately 30% pre-leased as of the first quarter of 2015 while no pre-leasing had been completed in Quarry Crossing B. Imperial Oil Campus hase II in Quarry ark has two additional five-storey buildings which are expected to come on-line in 2016. Ronmor Developers The Odeon in the heart of Marda Loop combines a mix of office and retail space. This development is expected to reach completion during the second quarter of 2016.The office portion was approximately 40% pre-leased as of the first quarter of 2015. Remington Development Corp. is proceeding with Quarry Crossing C, D and E in anticipation of future demand. These three, five-storey office buildings will contain between 148,000 sf and 181,000 sf of office space. arkade excavations are currently underway. References: Shankar, B. (April, 2015). Strong Recovery in Oil prices Unlikely, Says Analyst. International Business Times. Retrieved from: http://www. ibtimes.co.in/strong-recovery-crude-oil-prices-unlikely-says-analysts-629858 International Energy Agency. (March 2015). Oil Market Report. https:// www.iea.org/oilmarketreport/omrpublic/ Featured Office Listings Vintage Towers 322 & 326-11TH Avenue SW Lease / Keynote Tower 1100-1ST Street SE B Centre 240-4TH Avenue SW Elveden House 717-7TH Avenue SW Avison Young Calgary Office Leasing Team Ryan De Boer 403.232.4361 Nathan Donahue 403.232.4320 Brock Evans 403.232.4383 Steve Goertz 403.232.4322 Larry Gurtler 403.232.4326 Eric Horne 403.232.4339 Chris Howard 403.265.9552 ext. 223 Will Mullane 403.232.4325 Alexi Olcheski 403.232.4332 Doug ilip 403..232.4317 Nairn Rodger 403.232.4309 John Savard 403.232.4309 Glenn Simpson 403.232.4329 Mark St. ierre 403.232.4319 eter Thorpe 403.232.4342 Todd Throndson 403.232.4343 Alex Wong 403.232.4327 Allan Zivot 403.232.4307 Business Condominium Team ali Bedi 403.232.4311 Fred Clemens 403.232.4312 uneet Nagpal 403.232.0725 Research Anthony B. Scott 403.232.4344 Sean Thompson 587.293.3361 Avison Young The Office Report - Calgary Market Q1 2015 page 5