More and more office towers in Calgary, Canada’s energy capital, are sitting empty, another sign the country is in the midst of an economic collapse and that the bubbly real estate market is beginning to burst.
Layoffs by oil and gas majors have driven vacancy rates in the city to 11.5% in the second quarter of 2015—up from 8.3% last year. Much of the blame has been placed on energy companies having over-extended themselves by leasing too much office space. The reason behind this strategy was the shortage of commercial space leading up to 2007, which left many oil companies unable to find space for their staff.
Crude oil’s drop from $100.00 to $42.00 per barrel since last year has made companies scramble for defensive financial strategies. One way to quickly cut operating expenses is to lay off staff and put unused office space on the sublease market. Suncor Energy Inc. (NYSE:SU), for example, has subletted an entire floor in its building, as well as announcing last January it would let go of 1,000 staff. (Source: Financial Post, last accessed August 14, 2015.)
But what happens if there is insufficient demand for it? The slowdown in Calgary’s real estate market is worrying, as it may well be an indicator of a coming economic collapse.
Sublease space for rent now accounts for approximately 40% of commercial vacancies in the city, up from 31% last year. The real vacancy rate however may be much higher, and here’s why.
While Calgary buildings such as the 58-story Bow are completely leased, not all of the space is used. A July report by Colliers International on Calgary’s real estate market has concluded that “ghost vacancies,” where commercial space is leased but empty, put the actual figure much higher. (Source: Calgary Herald, last accessed August 14, 2015.) Indeed, vacancies have not kept pace with lay offs, indicating that a significant portion of space has been left empty.
But why would anyone hold on to empty offices?
Many of the larger energy majors seem to have adopted a wait-and-see approach, attempting to sublease unused space but not actually getting rid of it. This approach hedges against the chance of being caught without enough space if and when oil prices eventually rebound.
How long these companies can keep up this strategy, and the effects of large commercial vacancy rates on Calgary’s real estate market, remains to be seen.