With the extremely tight supply and strong demand seen in the downtown commercial real estate market over the last few quarters, the 1,282,000 SF of new supply made available in the first quarter of 2007 had a noticeable impact on that market.  The newly available premises in Livingston Place, Opus 8, and Centrium Place drove net absorption rates up to 853,003 SF for the quarter, nearly twice the net absorption in the downtown market for the entirety of 2006.  Additionally, downtown vacancy rates rose to 1.8% with both headlease and sublease space becoming available as tenants vacant premises to take occupancy in new buildings.  However, while this vacancy rate represents a significant increase from that seen in recent quarters, it remains low by historical standards.

This is reflected in the fact that asking lease rates across all downtown classes continued to rise through the first quarter of 2007, albeit at a much slower rate than the market experienced in 2006.  Average asking rates for all classes reached $36.31 psf this quarter.  The effect of the newly completed construction, however, was felt in the market for Class “AA” premises, where asking rates fell slightly to $46.18 psf, reflecting the rates negotiated in pre-leasing arrangements, which were lower than current asking rates.

While demand remains strong and downtown office markets remain tight, the completion of new construction will continue to have a significant role to play in balancing this market going forward.  A total of 5.21 million SF of office space in eight buildings is slated to be added to the downtown market over the next several years, including the newly announced Penny Lane project, with 225,000 SF expected to be added to the market in 2007 with the completion of  Homburg-Harris I.  This new space is expected to help move the market to a more sustainable balance between supply and demand.

In the suburban market, by contrast, the 144,000 SF new supply was not able to significantly slow the increase in asking lease rates, which rose to a new record high of $21.15 psf.  Net absorption was 134,200 SF, nearly equaling the amount of new space added to the market and as such, vacancy rates rose only marginally to 2.1%.  The 820,000 SF of new space expected to become available in the very near term is similarly not expected to keep pace with demand, however the 2,730,000 SF of new space to be added before the end of next year is expected to have enough of an impact to alleviate the tightness of the market.

*Average A space lease cost downtown and average all classes suburban

Source: CB Richard Ellis; City of Calgary Corporate Economics & Calgary Economic Development, Calgary Quarterly Economic Report