Calgary’s real estate market appears hardest hit of five North American oil and gas hubs examined in a new report from CBRE Research. As the lone Canadian city scrutinized, Calgary has the smallest commercial office inventory and the highest dependence on energy sector employment of the group, which also includes Dallas/Fort Worth, Denver, Houston and Pittsburgh.

The cities are prominent bases for energy company headquarters and affiliated service providers — employing executive, professional and administrative staff, and ultimately reflecting the vitality of extraction and production activities located elsewhere. From a broader real estate perspective, CBRE analysts characterize the five as a “handful of key sub-markets” where prolonged weak oil prices are likely to be more noticeably detrimental.

“Low pricing on crude oil and gasoline is largely positive for economic growth and for commercial real estate, particularly in non-energy markets,” the report’s executive summary reiterates.

Meanwhile, commercial tenants in the five energy sector hubs have collectively returned 5 million square feet of sublease space to the market since mid-2014, with Houston and Calgary taking on 86 per cent of that newly vacated space. Calgary’s 1.4-million-square-foot share bumped total sublease space in the city up to a historic high of 3.7 million square feet, of which the vast majority is attributable to downsizing energy companies.

Calgary was alone among the five markets in recording negative absorption in the first half of 2015, boosting its vacancy rate to 14.4 per cent. It also awaits the largest influx of new office space as a percentage of its overall stock. Upon completion, the 5.7 million square feet now under construction will account for 8 per cent of the office supply.

U.S. supply and demand

The U.S. markets are similarly experiencing building booms, with nearly 12 million square feet under construction in Houston; 7.3 million square feet underway in Dallas/Fort Worth; 3.1 million square feet under construction in Denver; and 1.8 million square feet in progress in Pittsburgh. All of them have larger existing office inventories than Calgary’s — ranging from 218 million square feet in Dallas/Fort Worth to 73 million square feet in Pittsburgh — and a less energy-intensive labour force from which to draw tenants.

Houston’s 156,000 energy sector workers represent 5.5 per cent of the city’s employment base, while Calgary’s 67,600 energy workers make up 8.5% of its workforce. Calgary is home to 85 energy companies, employing twice as many workers as Dallas/Fort Worth (33,550), nearly five times more than Denver (14,000) and nearly seven times more than Pittsburgh (9,700).

Lest Pittsburgh’s status in the group seem questionable, however, the CBRE report tags it as a rising player in the emergent shale gas industry. Situated between the Marcellus and Utica shale deposits, the city has seen a surge in both industrial and commercial demand, with the latter housing a growing number of “ancillary and support companies such as law, finance, engineering and environmental firms.” Denver is likewise aligned with shale gas production, which CBRE calls a “significant driver in Denver’s early recovery and standout economic growth story throughout this expansion cycle.”

Dallas/Fort Worth’s vacancy rate remains above Calgary’s at nearly 18 per cent, but the other three cities have tighter markets with vacancies at 13.4 per cent in Houston, 13.2 per cent in Denver and 10.5 per cent in Pittsburgh. Nevertheless, Dallas/Fort Worth, which ranks as the fourth largest market in the U.S., boasts the highest year-over-year absorption rate of the group at 1.4 million square feet from mid-2014 to mid-2015.

A more diverse economy — 1.1 per cent of Dallas/Fort Worth’s total employment is in the energy sector — has helped cushion the oil and gas price crunch. “Notably, no single employment sector in the metro region constitutes more than one-sixth of the metro’s overall job base,” the report notes.

Canadian downturn

Looking north, Canada’s less buoyant economic performance and the downward trend of its real estate cycle further differentiate Calgary from the U.S. energy sector hubs. CBRE analysts point to the general slowdown in investment activity in almost all Canadian markets except Vancouver, Edmonton and Waterloo.

Caps rates jumped more sharply in Calgary as the volume of office sales in the first quarter of 2015 declined nearly 90 per cent from one year earlier. In sync, net asking rents in downtown Calgary have fallen 18.3 per cent since mid-year 2014.

The industrial and hotel sectors are also experiencing flow-through impact from lower oil and gas prices, although the rising industrial vacancy rate can be partly linked to national and international retail closures affecting warehouse and distribution activity. At mid-year, the industrial vacancy rate was 1.7 per cent higher than in June 2014, sitting at 4.8 per cent. In the same period, hotel occupancy dropped 3.3 per cent and revenue per available room declined at an even steeper 7.5 per cent rate due to reduced oil-related business travel and general economic downturn.

This is contrary to expected trends in the economy as a whole.

“Spending less on gasoline encourages consumers to spend more on other items, which may solidify retail and hotel market fundamentals,” the CBRE report states. “Lower oil-related input costs will also reduce certain construction, manufacturing and logistics costs in support of business investment and expansion, thereby boosting demand for warehouse and manufacturing space.”

Yet, for Calgary, none of this is new. Like real estate and economic analysts in general, the CBRE report already foresees better times.

“Calgary has weathered oil price volatility in the past and will recover from the current setback once prices rebound,” it maintains. “Given the expectation that oil prices will increase over the next 12 to 18 months, the 5.7 million square feet of office development currently underway may be well timed to accommodate the next round of growth in the oil and gas sector. The long-term positive outlook for conventional and unconventional oil and gas production in Canada is attractive to long-term investors, and bodes well for a 2016 market rebound.”