Rapid expansion on easy credit can look like progress in the short run, but the process seduces capital to malinvestment, creating superfluous supply followed by an inevitable bust and years of economic stagnation thereafter. At the leading edge of the commodity cycle, Calgary is a case study in boom and bust and there are plenty of lessons here for the rest of Canada and beyond.
In the late, great commodities boom, oil prices leapt from $10.65 a barrel in Dec 1998 to $147 by July 2008. Few noticed when prices were bottoming but excited masses piled in as the cycle peaked on the 2005-08 global credit bubble. Uninformed optimism about the oil sands attracted a frenzy of workers and developers to Calgary. Although the demand growth peaked in 2007, central bank stimulants revived prices, animal spirits and even more mal-investment between 2008-2015, before oil prices collapsed once more.
Some ten million square feet of office space was built in downtown Calgary alone between 2007 and 2016. All of this has helped set up Calgary (Canada and much of the world) for a long, slow, pay back period. A recent study by the Conference Board of Canada, estimates that the mean reversion period in Calgary to correct for prior excesses, is likely to take the next decade. The knock-down effects will continue far beyond Calgary and oil, to real estate, REITs, retail, financials, employment and Canada’s over-indebted economy broadly. Yet another opportunity for people to finally learn and understand the power and pain of cycles. One can hope.
See Vacant skyscrapers are an ‘albatross’ that Canada’s oil capital can’t shake off too soon along with a sobering video report here:
It’s estimated there is 13 to 14 million square feet of vacant space within Calgary’s striking cluster of glass towers. That’s equivalent to all the office space in downtown Vancouver.
Many skyscrapers, including the Bow, have completely empty floors. In others, just a handful of people occupy space where hundreds used to toil.
It will take such a long time to refill that space and Calgary may not see a new tower constructed until 2029, according to a study by the Conference Board of Canada.
As bad as it is, the vacancy rate is expected to swell even more in the next two years as three new buildings under construction are completed: a 564,000-square-foot building by Manulife is nearly ready; Brookfield Place, at 1.4 million square feet, is due to open this summer; and Telus Sky, at 430,000 square feet, is scheduled for 2019.
“The decisions to build these building at the time were the right decisions,” said Greg Kwong, regional managing director, Alberta, at CBRE Inc. “We needed the space.” Then, he said, oil prices collapsed, government priorities changed, “and the music stopped.”
Although office space is increasingly pricey in other Canadian cities, particularly Toronto, lease rates in Calgary have plummeted by 75 per cent at some places to $10 to $15 a square foot on a five-year lease for the highest-quality space, from a peak of $40 to $45 in 2013, Kwong said.”