The commercial real estate picture brightened for Calgary landlords this quarter with more than 350,000 square feet of office space filling up between the downtown and suburban markets.

But it’s still a tenants’ market because of high vacancy rates, said Mike Gigliuk, research director for CB Richard Ellis Alberta Ltd.

“It remains to be seen whether the momentum can be sustained over the remainder of the year,” he said. “For downtown offices, we have moved our forecast up to 400,000 sq. ft. positive (absorption), which is about the annual average for the past 10 years.”

The market for industrial space is balanced between landlords and tenants. Despite new construction, vacancy rates have remained low. For suburban offices, this year’s steady absorption should continue.

“Downtown we are looking at absorption of 246,000 sq. ft. for the quarter. That caused the vacancy rate to drop from 13.8 per cent to 13.1 per cent, a 0.7-point decline,” he said. “The main area we’ve seen the drop in vacancy in is sub-lease, with almost 200,000 sq. ft. absorbed.”

The suburban office vacancy rate is 15.1 per cent, down 0.6 percentage points from the middle of the year. Absorption was 122,000 square feet.

Economic indicators for the economy are a good guide to what will happen in the industrial and suburban office markets.

For the downtown market, forecasters have to look at energy indices and merger and acquisition activity as well, because downtown is still about 80 per cent direct or indirect oil-and-gas industry tenants.

Tenants are more diversified in the suburban markets, so the key economic indicators are a better predictor of suburban office demand.

Oilpatch mergers and acquisitions have fallen this year after setting records in 2001 and 2002 – one of the factors reducing the need for office space in the downtown in those years.

With drilling and exploration rising, oil companies have to budget for the extra space.

“You can only hold off taking space for so long when drilling activity increases,” says Gigliuk. When exploration companies take more space, they are
followed by firms providing technical services to the energy business, then the professional services such as lawyers and accountants.

Meanwhile, in Edmonton, the office market has seen vacancy decline and the
industrial market remains vibrant.

Total office vacancy downtown is 12.7 per cent of the 13-million-sq.-ft. market, with 83,000 sq. ft. absorbed this year, said Dave Young, vice-president and Edmonton manager for CB Richard Ellis Alberta Ltd.

Headlease space is 11.7 points of that, so sub-lease vacancy is a smaller proportion than in Calgary.

The market is fairly flat right now in terms of activity. “It’ll probably end the year in the mid-12 range,” Young said last week.

The financial sector is at 12.2-per-cent vacancy, down from 13.7 per cent at the start of the year, with 143,000 sq. ft. absorbed so far. Government-sector users gave up 60,000 sq. ft., for the 83,000-sq.-ft. overall absorption figure.

Suburban office vacancy overall is 10.6 per cent.
Industrial vacancy is four per cent  – and that’s just structural vacancy, said Young.

“With inventory up and vacancy about the same, it indicates there is significant gross absorption of new buildings.

“The Edmonton industrial market is a very, very strong and buoyant market and that will continue,” he added.

Many oil drilling and oilsands projects are serviced from Edmonton, so activity in Fort McMurray “does nothing but strengthen our local economy,” he said.
Dean Wulf, vice-president and general manager of Royal LePage Commercial Inc. in Edmonton, said the office
market had picked up in the third quarter.

He rated absorption at 111,743 in the third quarter, after a negative of 45,164 in the second quarter.
He also cited oil and gas activity in the north as a cause of economic growth in the
capital.

“That’s where the demand is driven from,” he said.