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.

We frequently read and hear from market participants that there is strong demand from investors and lenders for Class A, investment grade assets in strong locations. We don’t hear much about the mid-market office, retail and industrial properties that make up a significant portion of the commercial real estate market. From a Calgary perspective, these properties are facing significant challenges related to operating cash flows, valuation and capital structure. Many of these owners are struggling with two significant risks – cash flow risk and refinancing risk.

Base10 has recently been out in Calgary inspecting and reporting on a range of Class B and C office, retail and industrial properties on behalf of mortgage lenders. This has been a great opportunity to see first hand what’s happening on the ground with these properties. Although we read a lot in the newspaper about signs of economic recovery, remember that commercial real estate lags the general economy. In many cases, this has been very evident given increasing vacancy levels and decreasing lease rates.

For an interesting perspective on the status of the U.S. commercial real estate market, we take a look at the rate of delinquency for commercial real estate loans in the CMBS market. This delinquency rate reached 8.02% in April, up significantly from 2.45% one year ago and the highest rate in the history of the CMBS market. For more details have a read of Trepp’s latest Monthly delinquency report.

March jobs data was released this morning by Statistics Canada. The numbers were below consensus estimates and the jobs, hours worked and wages numbers continue to give us reason to be concerned about the demand for commercial real estate.

This research report issued by TD Bank last week is a must read for a look at Canada’s office markets. Regarding the Calgary commentary, use some caution in interpreting the high level data provided.

An article from Tuesday’s Globe & Mail titled “U.S. property plunge – how low will it go?” gives a great overview of commercial real estate issues in the U.S. Could we see similar problems in Canada?

From today’s Wall Street Journal…”Canada’s Proximity, Familiarity Lead Companies to Scout Locations There When Growth Farther Afield Seems Too Risky.”

Statistics Canada just released employment insurance data for January 2010. This data provides another perspective on unemployment, which is critical to the demand for commercial real estate.

This brief report was put out by Deloitte today and shares some insights into current market trends in the US. There are a lot of similarities to what we are experiencing here in Canada – declining real estate values, debt maturity and credit access, and stalled construction.

Canadian retail sales data were just released for January 2010 and made very strong headlines with a +0.7% month-over-month gain. Excluding auto sales, retail sales were up more than 1.8%, triple the consensus estimates. What do the details tell us about these headlines? As we’ve said in the past, things aren’t as strong as they may seem.

David Parker’s column on Friday March 5 references comments from Cushman & Wakefield on the state of the retail industry in Calgary. According to Cushman, “Although retail transactions slowed down, that sector has remained fairly strong here and has rebounded the quickest”. Let’s have a look at what the numbers really tell us.

Statistics Canada released the latest employment numbers this morning. This is a positive report with Canada seeing an increase in employment of 21,000 jobs. Alberta, however, was the only province with a notable employment loss in February of 15,000 jobs.

Today’s newspapers provide us with two different interpretations on Manpower Inc.’s recent employment outlook for Canada. The Calgary Herald takes a bullish perspective and tells us “Hiring set to bud this spring with Calgary firms”, as according to Manpower, 18% of Calgary businesses plan to hire in Q2 2010. The Globe & Mail’s interpretation of the same report is a little more realistic…

Q4 real GDP growth in Canada came in well above expectations at a 5% annual rate. This has lead to speculation about potential interest rate increases coming in the near future. David Rosenberg, Chief Economist at Gluskin Sheff, provided some great insights on this topic in his morning commentary today.

The Real Property Association of Canada put out a research report in the fall of 2009 titled ‘Canadian Institutional Commercial Debt Market Report’. The report provides an interesting look at the total magnitude and range of commercial debt in Canada.

A recent Argus Software newsletter comments on the importance of DCF analysis. In an environment where many properties are experiencing declining cash flows, it is critical to analyze market and property specific factors over time and get away from a typical ‘back-of-the-envelope’ type of approach.

This article from Wednesday’s Calgary Herald presents an overly optimistic view of investment activity in Calgary’s commercial real estate market. Was 2009 really that strong? It’s important to look in some more detail at the real story here.

“Calgary condo market hampered by unsold inventory” is the headline in this article from today’s Calgary Herald. There are some very important market factors to consider as a lender or developer in this market.

Purchased at the height of the real estate boom for $5.4 billion, the complex was worth an estimated $1.9 billion by January 2010 when the owner turned the keys over to a group of creditors. This article demonstrates the severity of the trouble in the US commercial real estate market.

A great article from today’s Wall Street Journal examines the potential for a housing bubble in Canada. The potential impact this may bring to the level of consumer spending has implications for commercial real estate that should be noted.

We’re proud to have launched Base10 Capital in November.