Spiking energy prices are powering a new wave of office construction in Calgary, Canada’s premier oil and gas metropolis.
A city of 1.1 million people in the province of Alberta, Calgary, now boasts the lowest office vacancy rate in the world — about 3 percent, according to 2008 figures. Although these numbers represent an adjustment from last year’s historic low of 1.5 percent, both tenants and leasing agents said they are still feeling the crunch in a city where Class A office space presently goes for an average of $55 per square foot.
As a result, more than a dozen office skyscrapers are currently under construction in downtown Calgary, representing 6.5 million square feet — a 13 percent increase in capacity. About 3.4 million more square feet of office space is being built in the suburbs.
“It’s very tough to get more than 100,000 square feet of contiguous space,” said Jack Matthews, president of Matthews Southwest and project manager for the Bow, a $1 billion, 58-story glass tower rising downtown. “Right now, people are officing in strange places.”
The Bow was designed by Foster and Partners, the distinguished U.K. firm responsible for the Hearst Tower in Manhattan. The tower is pre-leased to EnCana, Canada’s largest fossil fuel producer.
Space is currently so tight that EnCana now houses its 3,500 employees and contract workers in five different buildings, according to spokesperson Carol Howe. But the Bow will enable EnCana to consolidate staff in one location, she said.
Calgary’s boom is being fed by record oil prices. Extracting fuel from the province’s tar sands, where most of the oil comes from, involves a process many times more expensive than tapping oil resources elsewhere in the world. Energy analysts say that while it costs about $8 a barrel to extract oil in the Persian Gulf, it costs about $60 per barrel to extract oil in Alberta.
For the boom to last, global oil prices need to stay high. But if they do, the region’s energy industry is expected to catalyze $100 billion in capital investment over the next five years, said Mike Gigliuk, director of research for the Alberta office of CB Richard Ellis, a commercial real estate company.
“I haven’t seen this kind of growth in 25 years,” he said.
About 100 different companies’ headquarters are located in Calgary, which has more “head offices” than any other city in Canada except Toronto, Canada’s longtime finance and business epicenter. Yet between 1999 and 2005, head office employment in Calgary rose 64.4 percent, more than triple the growth rate of Toronto.
The current building wave represents 57 percent of all office construction nationwide. Interestingly, this isn’t the first time Calgary has experienced a full-throttle commercial real estate stampede; demand for oil sparked a transformative building frenzy in the late 1940s. Another decade-long building boom was fed by the Arab oil embargo in the 1970s.
A unique feature of development is Calgary’s so-called “15-pluses,” essentially enclosed elevated walkways connecting buildings. Virtually every mall, office tower and condo building in the central business district is connected by these spans, as are libraries and indoor gardens. During the winter, residents who live and work downtown can do so without ever setting foot outdoors.
However, the cycles have had their downsides, too. A worldwide drop in oil prices in 1981 sucked nearly all the momentum out of the city’s energy sector, and a drop in oil prices in 1991 led to another property crash. In that slide, office vacancy rates rose from about 7 percent to over 20 percent in a year.
According to Gigliuk, a bust comparable to the ones that occurred in 1981 and 1991 is unlikely to occur any time soon, largely because of unconventional oil processing methods that have come on board over the past 15 years.
“Oil sands development has a 50-year time horizon — much longer than conventional oil processing,” said Gigliuk. “It takes the cyclicity out of the market,” he added.
Alberta’s oil sands capacity is thought
to be second only to that of the Saudi Arabian reserves.
The confidence in the Calgary market has led many office developers to abandon typical real estate practices such as securing anchor tenants prior to construction.
“It’s the first time I’ve seen spec projects in my 12-year career,” said Loy Sullivan, director of office leasing for Eighth Avenue Place, the first phase of which will be ready for occupancy in 2011.
The billion-dollar project, which includes two office towers, is being built on speculation and is financed by SITQ, Canada’s biggest pension fund manager, and bcIMC, another institutional investor.
Calgary’s oil success has helped create a healthy environment for many other industries, including manufacturing and high-tech start-ups. The area is also popular with film production companies. Nevertheless, the office tower craze has little to do with economic diversification, experts said.
“There are lots of other things going on in Calgary,” said Matthews. “But oil is the driver.”
Linda Baker is a freelancer covering the Pacific Northwest.