by Bryan Slauko

“Local economy insulated from global woes” – Calgary Herald, October 26, 2011.

Really? I love the entrepreneurial spirit that exists in Calgary but this kind of opinion troubles me.

Do you remember when the bottom fell out of the economy in 2008? At the time, many people and companies were overly optimistic and did not plan for the potential downside that became a reality. At the present time we’re facing a lot of global economic uncertainty that has the potential to have a significant impact on the oil prices which are driving much of Alberta’s economy.

We continue to hear lots about record office absorption in the Downtown Calgary office market. Altus reports approximately 2.0 million square feet of absorption during the 9-month period ended September 30, 2011. This level of absorption already exceeds any historical annual absorption figure we’ve seen in the past 10 years. So the important question to ask is whether or not these numbers are real and sustainable. Let’s take a deeper look at the data and see what’s happened since our last report was released.

The table below summarizes quarterly absorption, or change in occupied area, for the 3 quarterly periods ending September 30, 2011.

• 90% of YTD absorption has occurred in the Central Core.
• There has been no absorption in the West Core until the most recent quarter.

Source: Altus Insite

Earlier this year Base10 released a research report on Calgary’s Downtown office market. The ABC’s of Commercial Real Estate identified the Downtown West Core Class B and C office market as an area of concern and took a detailed look at the 17.4% and 16.8% vacancy rates they showed at May 30, 2011. Since then we’ve heard lots in the media about continued record levels of office absorption, so we thought it was time to take a look and see what’s happened in the West Core since we released that report.

Fast forward to September 30, 2011 and we see these vacancy rates continue to be high, at 15.3% and 18.1%, respectively. The table below highlights key West Core market data as at September 30, 2011.

Source: Altus Insite

A new report shows office vacancy rates in the downtown could soon be going up.

According to a report by Base10 Capital Advisors, the vacancy rate will increase from 7.9 per cent to 16 per cent by the end of the year.

A large reason is the completion of the Bow Tower and the addition of 6 other office buildings since 2009.

Brian Slauko of Base10 Capital Advisors tells 660News, since January 2010, 96 per cent of the 3 million square feet of space absorbed in the core has been new inventory but employment stats show there’s been little increase in office workers to fill that space.

Our recent 2011 report – The ABC’s of Commercial Real Estate – was written to bring focus to a number of challenges being faced by owners and investors in Downtown Calgary’s Class B & C office sector, particularly in the West Core:

• According to Altus Insite, West Core Class B & C office space is currently experiencing vacancy rates of approximately 17%.
• Cash flow in many of these buildings has been drastically reduced as lease rates have declined by approximately 50% from 3-4 years ago when many buildings were acquired or financed.
• Securing mortgage financing for these assets is extremely difficult today and even continuing to make debt service payments can be a challenge given declining lease rates.
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Base10 report Bearish on Downtown Office Space

Calgary, AB: Base10 Capital Advisors released today The ABCs of Commercial Real Estate – a Bearish Outlook for Downtown Calgary, a wake-up call to owners, investors, developers and tenants that the economic realities are very different from the picture that has been painted of the downtown Calgary office market.

Private equity is an important source of capital, whether a client is looking to workout, restructure or refinance an existing loan, considering an acquisition, developing a new project, or is simply short on funds to support capital expenditures and tenant improvement costs. Knowing where to access that capital, and how to present the facts and analysis that will accurately demonstrate investment value to a high net worth investor is essential.

In today’s market, the most vulnerable sectors that lenders may be exposed to include commercial loans tied to residential land acquisition and development, residential and commercial condominium development and construction, and recreational property development and construction. Many of these projects were financed when consumer demand was much greater and market valuations were significantly higher. Lenders are now facing situations where demand is seriously impaired, valuations are unclear and the path to repayment of these loans is not apparent.