It looks like a steady year for office leasing in Alberta’s major cities.

Calgary still lives on oilpatch fundamentals, while Edmonton remains a true government town.

In Calgary, downtown vacancies are diminishing as energy industry indicators rise. The city’s business heart finished 2003 with declining vacancy rates, a turnaround that followed more than two years of bad news for landlords.

Randy Fennessey, a partner at CMN Calgary Inc., said that the vacancy rate downtown was 11.7 per cent, compared to 13.8 per cent at the end of 2002.

In 2003, Calgary experienced a two-percentage-point reduction in vacancy, with 726,000 sq. ft. of vacant office space taken up.

Asked if the stock market’s restored fortunes would help the downtown office market, Fennessey pointed to the continued dependence of the central business district on the oil and gas industry. The Standard and Poor’s TSX capped energy index relates directly to occupied space downtown – vacancy decreases as the index goes up.

The city has headed into the new year with a reasonably stable office supply. CMN Calgary’s outlook document predicts a scarcity of large chunks of office space – there are only seven blocks greater than 70,000 sq. ft., limiting choices for larger tenants.

At Royal LePage Commercial, researcher Laurel Edwards also expected downtown to remain stable. “We’re not really expecting any major happenings in the downtown market,” she said.

Downtown office vacancy was 10.5 per cent at the end of 2003, “and we expect it to drop to nine per cent by the end of 2004,” she said.

(Different real estate firms calculate vacancy and availability differently, so their numbers are not identical.)

Sublease space will be a factor in the downtown market at 27 per cent of the vacancy, but less than it was in 2002, when 36 per cent of the vacant space was in the sublease market. Rental rates won’t change much, but landlords will offer inducements to tenants of headlease space to compete with lower-priced sublease space.

In the Beltline area immediately south of downtown Calgary, space absorption and demand will continue.

The area showed signs of recovery, ending 2003 with a vacancy rate of 15.1 per cent.

The other suburban markets should also be stable after ending 2003 with an overall 12.4-per-cent vacancy rate.

The northeast part of Calgary had the highest vacancy, but considerable space absorption.

“That was good to see for it because it’s been hurting for a while,” said Edwards.

Vacant sublease space is having the same effect on the suburban office market as downtown, she said.

Calgary’s industrial market saw a slight increase in vacancy last year, finishing at 5.9 per cent. That was up from 5.1 per cent at the end of 2002. The northeast had the highest vacancy again at seven per cent.

“We do expect demand to remain high for space and construction, so we don’t expect a huge change in the vacancy rate in 2004,” she said.

Demand for industrial land will also continue to be strong, she said.

This year will also see completion of many build-to-suit projects that won’t affect vacancy, but will add to inventory.

In the Edmonton market, industrial real estate has been hot, as has retail.

However, the office market remains steady, said Dennis Herbut, a partner at J.J. Barnicke.

“I think 2004 will have modest absorption, a slight fall in vacancy and steady rents,” Herbut predicted.

He noted that the capital’s office vacancy rate was 17 per cent in a soft economy at the end of 1993.

At the end of 2003, Class A buildings – defined as a high-end office buildings – in the financial sector downtown had 9.6 per cent vacancy, with Class B buildings, considered to have fewer amenities than Class A, showing at 10.1 per cent.

The government sector had a vacancy rate of 6.1 per cent.

Edmonton has 14.7 million sq. ft. of office space in a downtown core running from 97th Street to 109th Street. It’s divided into the government sector west of 105th Street and the financial sector to the east.

Herbut said suburban office vacancy was 8.7 per cent at year end. New construction of owner-user space is more likely than speculative building in the suburbs.

Nothing new is likely to be built downtown, he said.

Downtown Edmonton has enjoyed healthy residential growth, with condos being added in recent years.

“That’s helped make it a bit more vibrant,” he said.

Edmonton and Calgary’s downtowns can’t be directly compared. Edmonton has less than half the office space of Calgary, yet the populations of the two cities are similar. The difference is retail and industrial employment, he said.

And in office space, Edmonton is still pretty much a government town, he added.

J.J. Barnicke’s research report notes that Edmonton is developing as the manufacturing centre for the oil and gas industry, especially with continuing interest in oilsands projects. It puts industrial vacancy at 3.5 per cent in Edmonton and five per cent in Calgary.