After two years of rising vacancy rates, office vacancies in downtown Calgary could level off this year – if the projections for increases in oil and gas drilling come true.

“There is an absolute, direct correlation” between the downtown vacancy rate and drilling activity, said Andrew MacLachlan, vice-president of sales and general manager of Torode Realty in Calgary.

There is typically a six-month lag between increased numbers of wells and increased need for office space for engineers, geophysicists, support staff and so on.

“What will most likely happen is that the bulk of any positive absorption that results from this will only take place in the latter part of this year or the beginning of next year,” he said.

The increase in drilling wouldn’t have to be a huge jump. Even a rise from 8,000 wells one year to 8,500 the next would have an effect.

“Any increase in drilling activity will have a result in total absorption in the marketplace,” MacLachlan said. “But a decrease can have a major negative impact in our marketplace.”

Another real estate brokerage earlier expressed cautious optimism for 2003. In an outlook for business, Royal LePage Commercial Inc. said leasing momentum picked up in the fourth quarter of last year. The rising vacancy rate may have peaked, although the real story on vacancies may be told in the first- or second-quarter figures.

MacLachlan at Torode said office vacancies rose about 2.5 percentage points in 2002, ending at 14 per cent over all building classes, up from 11.5 per cent in the first quarter of last year. When the vacancies are broken out by classes, the most prestigious Class AA buildings are only 6.5-per-cent vacant. Class A high-end buildings have vacancies of 14.5 per cent, B Class buildings have 16-per-cent vacancy and C and D Classes have 20 per cent, say Torode’s figures.

Thirty-eight per cent of the vacant space is sublease space, but there is little sublease space in the most prestigious buildings, said MacLachlan.

The Kyoto Accord, mergers and acquisitions in the oilpatch, the disappearance of mid-cap oil and gas companies and the possibility of war in Iraq all have their effects on vacancy and absorption.

“Overall, the real estate market is diversified: you get into the suburban markets, you get retail development, industrial development, land banking for future industrial development, some manufacturing, warehousing and distribution.

“If you look over the last several years, all of these industries, as a percentage of GDP, have grown significantly, whereas oil and gas dipped somewhat as a total percentage of GDP,” he said. However, “Calgary’s downtown core is driven by the oil and gas market.”

The Kyoto effect might already have happened. “I don’t know that it will have a negative impact,” MacLachlan said. “It just won’t have a positive impact.”

Torode was working with a tenant on a deal for 100,000 sq. ft. when Kyoto issues arose. The deal didn’t take place.

“They’re still occupying space, but they don’t occupy 100,000 sq. ft.,” he said.

In the marketplace, lease rates are still going down and the pressure is greatest in B Class offices. They aren’t likely to go much lower in prestige buildings because the vacancy rates are so low.

MacLachlan described a flight to quality in which tenants in C Class buildings can move to sublease space in A Class buildings if the remaining lease term is long enough. “They will pick up a lot of the sublease space to the detriment of the C and D markets,” he said.

So is Calgary’s downtown leasing market ready to turn the corner after two years?

“Maybe we’re at a neutral absorption number as we speak today,” he said. “But we’ll only know in another month.”