How Calgary copes with a record amount of office space sitting empty

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Kelly Doody is still grappling with the financial setbacks that hit her small business in Calgary’s Inglewood neighborhood two years ago, when she learned her property tax bill was going to grow more than fivefold in a single year.

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Ms. Doody, whose company, Social School, teaches digital marketing to entrepreneurs, was among thousands of businesses in the city that suffered significant growth due to collateral damage from Calgary’s downtown vacancy crisis.

As those vacancies caused downtown property values ​​to plummet, the city was forced to make up for that lost revenue elsewhere, and Ms. Doody says businesses like hers are still paying the price. Rising property values ​​in Inglewood made things worse for him.

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“The uncertainty is too high for businesses at the moment,” says Ms. Doody.

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With Calgarians voting in an election on Monday, the impact of office vacancies on the municipal budget will be one of the toughest challenges for the next mayor and council. Mayor Nahid Nenshi and most councilors are not running again.

Calgary’s downtown office towers are currently about 30 percent empty, the impact of which has caused uproar across the city and wreaking havoc on municipal finances. Initially, a significant drop in city assessments meant commercial landlords elsewhere in the city, especially in comparatively bustling neighborhoods outside the core, such as Inglewood, were asked to pay more to fill the gap. Was.

But it created a crisis in itself, with small businesses warning their livelihoods were threatened by huge tax hikes after years of economic decline in the city.

Calgary’s main mission: to turn the ghost town of office towers into a neighborhood to be lived in

The Void in Calgary: How the office towers in the once bustling city became empty

The high rate of office vacancies is still a significant problem for Calgary and its long-term financial health, as the city tries to reverse the damage by rediscovering its city, while reducing its budget on lucrative tax bills paid by the owners. depends on. of office towers.

The municipal property tax system operates in such a way that when assessed values ​​only fall in a specific area, such as the downtown core, the tax bill for those properties is reduced and the shortfall is redistributed to properties elsewhere. In 2019, that meant $250 million was earmarked to move commercial landlords outside of downtown, with more than half of nonresidential owners facing a tax increase of more than 10 percent.

The local government reacted by digging into its rainy day fund to limit the increase in commercial property tax to 10 percent and offering millions of dollars in relief. The city slashed its budget by $60 million in 2019, resulting in more than 100 layoffs and cuts in services such as public transportation. This was followed by a reduction in the proportion of tax revenue paid by businesses, effectively increasing the property tax for homeowners.

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The city council increased the commercial property tax by 10 percent in 2020 and most recently in 2021, when it approved a further $13 million in relief.

Calgary’s acting appraiser and director of valuation, Eddie Lee, said pricing downtown, while still falling, is now leveling off, though he said the COVID-19 pandemic has added a new layer of uncertainty.

“I think it’s definitely stable,” he said. “I don’t know if it is rock bottom or not. The biggest unknown factor is the pandemic and what the future of working in an office will look like.”

Appraisal values ​​are calculated by looking at several factors, including vacancy, lease income and recent sales of office towers. Mr. Lee takes as an example the construction of Stephen Avenue Place, a 40-story tower formerly known as Scotia Center. It sold for $280 million in 2012 and again in 2018 for less than $100 million. According to data from Avison Young, the building is half empty.

Avison Young, a real estate firm that tracks office leases in great detail, said another factor is the many new buildings, which It was planned during a strong economy in the early 2010s, finished and opened at the height of the oil downturn, adding more space to be leased to no one.

While the city has made the worst of that assessment problem for now, spending millions of dollars each year to shield out-of-town businesses from the tax increase is not sustainable. The long-term improvement is reducing those vacancy figures, bringing workers – and attractive property values ​​– back to the city.

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The city council set aside $200 million as it approved a long-term plan for the downtown core. The Greater Downtown plan focuses on economic diversification, while aiming to transform the city into a mixed-use neighborhood where people live, work and play.

The plan calls for more housing in the downtown core and in neighborhoods directly east and south, with a focus on units suitable for families, as well as below-market affordable housing for low-income residents. The document outlines ways to make it easier for people to move around, such as through better public transport, better facilities to make the city a more attractive place to live, and post-secondary institutions within the city. bring to the centre.

The East Village neighborhood to the east of City Hall, which includes thousands of units of housing and new commercial space, has been hailed as a model of what is possible. The city has a similar plan for an area southeast of downtown called the River District, where housing units for 8,000 people are planned around a new area that had just been approved and a new convention center that was previously Has been under construction since.

The Greater Downtown plan also focuses on converting office towers into housing, a costly and complex task but one that has already been tried in several buildings that are either finished or in the process of being converted. The federal government has set aside $300 million to convert Canada’s unused office space into rental housing.

While the owner of a converted building will pay a much lower property tax, Mr. Lee said that anything that closes the vacancy gap will increase the taxes collected from office towers in the long term.

Of the two clear frontrunners in Calgary’s mayoral campaign, a centrist councillor, Jyoti Gondek, has the most detailed proposals for the city. Ms Gondek, who voted for the Greater Downtown plan, has released a platform that pledges to broadly implement it.

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“We are moving towards a real mixed-use city model rather than one built just for offices,” Ms. Gondek said in an interview.

“We are now rebuilding our city to be a place where you can get through your daily routine, where you pull over, sit at your desk and leave.”

Ms Gondek also wants the provincial government to use a portion of its share of property tax revenue to help cover the revenue generated from the city’s lower city property assessments.

She said the city has “fainted” to an economic downturn because the oil industry has always come back first. Ms Gondek said this time it is clear that Calgary needs to redevelop itself rather than wait for the oil field to save the city.

Jerome Farkas, a conservative mayoral candidate who has focused as much on opposing Mr Nenshi as on competing against Ms Gondek, wants to repeal the downtown plan. He said it needed to be overhauled to include more feedback from the public, and he wanted to focus more on public safety, education and entertainment.

He said previous mayors and city councils should have focused more on mixed-use development downtown to add housing, which he said would have positioned the city better to weather the current recession.

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While Mr Farkes has not issued a specific policy issue focusing on downtown – none of the points in his “10-point plan” for the city are about the origin – he did say things like freezing property taxes. Policies bring in more businesses to fill the vacant office. tower

“This is an existential problem for the city,” he said in an interview.

“This campaign is about the future of Calgary, it’s about economic opportunity and the issue of downtown vacancy symbolizes it. The lack of opportunity being experienced by Calgarians is playing out in a different way, but it’s about those empty office towers.” is most visible through.

Whoever wins a municipal election faces a complex problem that will take years to solve. And there will be no one thing that can fix it.

Avison Young’s Susan Thompson said the city’s vacancy rate has now surpassed the worst recession in the early 1980s.

He said the city needs to follow several policies including promoting industries like green energy and technology and converting unused space.

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“We have 14 million square feet sitting vacant — that’s a lot of tenants, it’s a lot of people, it’s a lot of renovated buildings,” she said.

“There’s a lot of things to break into this. We certainly want to consider every possibility to help Calgary’s situation.”

Avison Young projects that Calgary’s downtown office vacancy rate will remain in the high 20s for at least the next few years, although recent rates have tracked the company’s optimistic projections as higher oil prices hit the economy. Begins to breathe life.

Ms Thompson said it was not yet clear how the pandemic would affect those…

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