A ‘flight to quality’ in downtown Calgary concentrates vacancy crisis in older buildings that need new life

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Calgary’s downtown skyscrapers are as empty as they have ever been since the oil-and-gas bust of 2014: as of the last quarter of 2021, more than a third of the total office space in the city’s core sat vacant.

But not all office space is created equal, and that vacancy – which has become a barometer for Calgary’s battered economy – is unevenly distributed.

The empty space is disproportionately concentrated in the west end of downtown, according to a recent report from the real estate services firm CBRE. There, where the leasable space is mostly in older buildings, the vacancy rate is close to 50 per cent. Among newer, more amenity-rich buildings, according to the report, the vacancy rate is much lower, at an average of around 20 per cent.

CBRE has described this situation as a “flight to quality” by Calgary’s remaining commercial tenants, who are now more easily able to afford high-quality space than they were in the past.

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Between 2012 and 2021, the price gap between the net rental rates in Calgary’s newer and higher quality buildings (which CBRE calls class A) and older or less lavishly equipped buildings (class B) dropped significantly. In the fourth quarter of 2012, the rental rate for class A was about $40 per square foot, and class B was about $30. In the same period in 2021, the rate for class A space was $13.07 and the rate for class B was $8.81.

Now, for only a little more than it would cost to rent space in an older building, a tenant can rent an office with modern amenities such as high-speed internet and improved ventilation and lighting.

High-quality office space supports the health of workers, noted Sarah Bramley, vice-president of workplace advisory at Colliers. “Having access to natural light is important to our circadian rhythms as humans. So is access to clean and fresh air,” she said. “Newer buildings have more equitable access to daylight. They tend to have higher ceilings and allow more penetration of light into the core.”

Many class-B buildings and class-C buildings (a lower level of office quality than B) don’t have these advantages, she noted. “They need some significant investment to get them up to the level of a new building, just in basic terms of health and safety and air quality.”

In Calgary, many class-B-and-C buildings were constructed more than four decades ago, a time when floor-to-ceiling, curtain-wall windows were not yet common, Ms. Bramley said. And their column grids tend to be tighter, constraining the potential for reconfiguration.

In April, the City of Calgary put aside $100-million to incentivize the conversion of vacant office space into housing. The federal government included $300-million in last year’s budget for office-to-residential conversions across the country.

While the city’s program isn’t targeted at class-B-and-C spaces specifically, they are the buildings that are most likely to benefit.

Sheryl McMullen, the program manager of Calgary’s downtown strategy, said that the first five projects to be funded will turn offices into residential rentals, because the demand for purpose-built apartments continues to increase. (The city plans to announce agreements with 11 developers soon.)

The second phase of the program will include conversions to other uses, such as postsecondary schools, health care facilities and public amenities.

Efforts to upgrade class-B-and-C buildings into modern office space are not yet covered by the city’s incentive. But funding this kind of renovation is not completely off the table, Ms. McMullen said.

In some cases, demolition may be the only option.

“If some buildings are just not in good enough condition to actually be able to realistically convert into another use, it may be a candidate for demolition,” she said. The empty land would be temporarily turned into park space, she added.

Ultimately, the goal of the office conversion program is to mitigate the city’s loss of tax revenue from downtown buildings whose value has plummeted, Ms. McMullen said.

Greg Kwong, an executive vice-president and regional managing director at CBRE, said he is skeptical that converting office buildings to residential units will have the desired results.

“If you’re going to build or renovate at top dollar, you’re going to want to rent it out or sell them for top dollar,” he said. Without the creation of new jobs downtown, converted buildings alone may not attract the tenants needed to fill them, he argued.

“It’s not a build-it-and-they-will-come issue.”

Vacant Calgary: This is part of a series on the future of Calgary’s downtown, hit by years of economic decline that has left its office towers nearly a third vacant, and the solutions that could drive a recovery.