Downtown Calgary: The Elephant In The Room?

While everyone seems to be in shock that Calgary's downtown office vacancy rate its 25%  our downtown still has more occupied office space than Vancouver, Portland or Austin. Cities with vibrant downtowns.  

Do we need to panic? Should we offer incentives for companies to move to Calgary? That is the elephant in the room....

Downtown Calgary's central business district has one of the largest concentrations of office buildings in North America. 

Downtown Calgary's central business district has one of the largest concentrations of office buildings in North America. 

The lights are still on, but is anyone still home in downtown Calgary. 

The lights are still on, but is anyone still home in downtown Calgary. 

SWEET DEALS

In 2001, Chicago got Boeing to move its head office from Seattle with a sweet deal - $60 million in tax breaks and incentives. In 2015, General Electric moves its head office from Fairfield Connecticut to Boston thanks to a whooping $145 million in incentives.

There's a general acknowledgement that tax incentives work. That they are a key tool for getting major corporations to bring business to town. But Calgary hasn't used this economic siren song to lure new business.

Is it time we did? Should we offer huge tax incentives to lure Amazon to downtown Calgary? Do drastic times call for drastic measures?

HERE'S THE PROBLEM

Look downtown and you'll see a whopping 10 million square feet of vacant office space.

It's hard to wrap your head around those kind of numbers, but it's the equivalent of 5,000 empty single-family suburban homes, or 10,000 condos, or about seven Chinook Centres.  Yikes.

Now traditionally, Calgary’s oil and gas sector has absorbed an average of 500,000 square feet of office space per year. So, even when (or if ) we get back to the old normal, it could take well over a decade to fill up the existing vacancy.

That being said, I remember planners and politicians in the mid ‘90s saying, that Calgary had so overbuilt, there would never would never be another new office building built in downtown Calgary again.  They were wrong.  We've added over a dozen new towers since then.

Clearly, we aren’t very good at predicting the future.  

This is an old graphic, but I expect the numbers haven't changed much. Only 7% of downtown's vacant office space is in C class i.e. older properties with low rent that appeals to start-ups.  The A and AA space (63%) demands higher rents and operating costs that only larger corporation can afford.  They are also owned mostly by pension funds who will be very reluctant to offer big discounts, they would rather be patient and wait for the right long term deal. (credit Colliers: Calgary Office Market Report Q4, 2016)

This is an old graphic, but I expect the numbers haven't changed much.

Only 7% of downtown's vacant office space is in C class i.e. older properties with low rent that appeals to start-ups.  The A and AA space (63%) demands higher rents and operating costs that only larger corporation can afford.  They are also owned mostly by pension funds who will be very reluctant to offer big discounts, they would rather be patient and wait for the right long term deal. (credit Colliers: Calgary Office Market Report Q4, 2016)

ATTRACTING NEW BUSINESS

Over the past year, Calgary Economic Development has hosted numerous Real Estate Advisory Group meetings involving Calgary’s most experienced property owners, managers, leasing professionals and city staff. But where have these meeting got us. 

R. Scott Hutcheson, Executive Chair of the Board of Aspen Properties (which owns several downtown towers, including The Edison aka rebranded Pan Canadian building) is emphatic that “we need both Notley and Nenshi at the table, everybody needs to be working together.”  He adds, “a lot of work has already been done analyzing the situation and looking at many different strategies. We have looked at various case studies like converting office building to residential, but it doesn’t work without some sort of incentives.” 

While he and other downtown building owners won’t say it publically, it is going to take some drastically different thinking (i.e. incentives) to fill up 10,000 million square feet of office space.  

The Alberta government has a poor track record of “meddling” in the economy – failures include MagCan (a magnesium plant), Canadian Commercial Bank, Gainers (a meatpacking plant) and NovaTel (the cellular subsidiary of Alberta Government Telephones). 

In 2005, the City of Edmonton lured Dell to set up a call centre (that would create 1,000 jobs) with a 20-year agreement to waive property taxes, a concession worth $1.1 million over the first five years. The company closed the call centre and left 2008.  

One has to wonder just how wise it is to provide huge incentives to win the Amazon Sweepstakes.

Trevor Tombe, an Assistant Professor of Economics at the University of Calgary, “cautions governments against using scarce public dollars to try and attract individual businesses. Such incentives distort economic activity, lower our productivity and require tax dollars be levied elsewhere to pay for them. Cities are also particularly ill-equipped to lean against business cycles. We would be better served to focus on neutral policies that improve the city overall: ensuring taxes are competitive, ease zoning rules, and maintaining a highly livable city to attract young and skilled workers.” 

He points to the paper “Head Office Location: Implications for Canada” by Head and Ries at Saunder School of Business, University of British Columbia commissioned by the Government of Canada’s Competitive Policy Review Panel in 2008, where they concluded, “While it may be appealing to offer inducements to attract head offices, there is no compelling case for promotional policies. Subsidies are likely to be counter-productive, since they can be subject to misallocation based on lobbying and they are likely to serve mostly to attract away headquarters from one Canadian city to another Canadian city.”

Link: Calgary Economic Development Report: Calgary's Economy In Depth

Given that 80% of the current vacancy space is less than 15,000 square feet is positive as that is the size of space that "start-ups" in various sectors will be looking for.  (credit Colliers: Calgary Office Market Report Q4, 2016)

Given that 80% of the current vacancy space is less than 15,000 square feet is positive as that is the size of space that "start-ups" in various sectors will be looking for.  (credit Colliers: Calgary Office Market Report Q4, 2016)

DOWNTOWN’S FUTURE

What happens if the oil & gas sector doesn’t come back, how do we back fill 10+ million square feet of office space.  Could downtown Calgary become an “innovation district?”  

Yes, the new buzz term in city-building and economic development is “innovation district” but there is no recipe on how to create one. Most happen organically rather than by design.  Usually, two or more synergistic businesses that are on the cusp of new technology locate near each and become huge successes, so others flock to be near them hoping the success will rub off.  

Could downtown Calgary become a green energy innovation district?  Could Calgary attract major Canadian and international solar and wind energy research companies to locate downtown. In fact, Suncor has operated six wind farms since 2002? Alberta and Calgary is rich in solar and wind power opportunities - could this be our downtown’s future.

A hundred years ago, the Robin Hood Flour Mills dominated the downtown skyline where Gulf Canada Square now stands. Perhaps it isn’t too far fetched to think that in the future the names of our downtown office towers might be Alberta Wind Energy Company or the Calgary Solar Power Corp.  

Downtown's 9th Avenue in the 1970s. 

Downtown's 9th Avenue in the 1970s. 

Last Word

Do we let downtown Calgary evolve naturally based on market demand and entrepreneurial forces? Or do we try to manipulate the office market by providing incentives for select businesses like Amazon?

That is the elephant in the room...

The lights are still on and there are still thousands of businesses calling downtown Calgary home.  In fact, more than in Vancouver, Portland or Austin, which all have thriving downtowns. 

The lights are still on and there are still thousands of businesses calling downtown Calgary home.  In fact, more than in Vancouver, Portland or Austin, which all have thriving downtowns.