CASE: All Systems Go

The sight of empty commercial space and dark tower floors isn't new to Calgary or unique to the Coronavirus pandemic. But with more people working from home, offices downsizing and many businesses folding, realtors are expecting already sky-high vacancy rates will continue to rise.

Until a few years ago, Calgary's downtown was a vibrant metropolitan area teeming with people and purpose. However, due to a number of geopolitical and economic factors, in 2014 the price of oil fell and with it came the fall of the thriving downtown core.

As oil and gas companies attempted to adjust to below-$50 oil prices, the inevitable downsizing of employees began to unfold. And while some jobs were transitioned and others were offered early retirement, one fact became certainthere would be fewer people needed and thus less demand for office space.

A June 2017 article in the Financial Post called the glut of empty office space in downtown Calgary an "albatross" around the neck of any post-recession recovery. "We went from essentially zero to almost 30 per cent (vacancy) in about 18 months," said Calgary mayor Naheed Nenshi. "I love roller coasters, but this is too much. The recovery will not be that quick. It's going to be more slog work."

And this slog work has involved turning something unseemly into something attractive. It was not as though there was no talent or innovative spirit in Calgary, but the oil crash had taken its toll on the city. Calgary's downtown had to diversify and divest from its overreliance on the oil and gas industry. Easier said than done, but that was the task facing government at all levels in Alberta.

Ironically, the best way to help Calgary's downtown was to go far away from it.

The destination was Silicon Valley, with a trip in April 2017 to the innovation hub just south of San Francisco to drum up some interest for all things Calgary. Joining Nenshi on this 2,000-km trip were the CEO of Calgary Economic Development and the Alberta Minister of Economic Development and Trade. The result was a new tenant in a dormant downtown Calgary office tower.

However this was no ordinary tenantit was RocketSpace, a globally recognized company that creates innovation campuses for start-ups. RocketSpace is one of the most sought-after accelerators, and receives numerous requests from cities just like Calgary to set up shows in their cities.

RocketSpace CEO Duncan Logan shared a few reasons why the company chose Calgary: a very organized and action-oriented delegation from Nenshi et al, along with a surprising amount of technology talent in Calgary and a willing landlord in Aspen Properties.

Aspen had an old property vacated by an oil and gas company and was looking to do something different with the space. The 30-storey building is in the heart of Calgary's downtown, right across the street from Calgary's grand Palliser Hotel. The landlord created some interesting perks for tenants of the building: a golf simulator, indoor dog park, and basketball court. "It's where we think the office building market will go. We don't think the old, corporate, staid office building is the office building of the future," Aspen CEO Hutcheson said. "We're really trying to create a building for millennials, which resonated perfectly with the RocketSpace guys."

RocketSpace's success at finding "unicorns"start-up jargon for billion-dollar companiesis an exciting proposition for Calgary. With a lot of talent available due to the downturn, but also a highly educated and motivated environment for change, much can be expected from RocketSpace's Calgary campus.

But with such a unique concept and space, it is clear that the traditional and conservative oil and gas company will not likely be a tenant at the Calgary RocketSpace campus. As mentioned by Aspen CEO Hutchenson, the focus is on Millennials. And much research shows that this generation is more willing to start their own companies and take the risks necessary to grow, while they are quite unwilling to accept the traditional 9-to-5 job they saw shackle their parents' generation.

So clearly to go big for Calgary's downtown will involve going smallsmall business, that is. Calgary Economic Development CEO Mary Moran, a member of the Alberta trip in April, put it best: "Filling this office space is a long game," Moran said. "Some people may say, 'these are just little things,' but little things can lead to big things. And we know this is where the job growth will come from in the futureit's going to come from smaller companies with 50 employees or less."

According to a new report from Avison Young, the office tower vacancy rate in downtown Calgary broke a new record in the second quarter of 2021 and now sits at 29.2 per cent. That's up from 28.9 per cent in the first three months of 2021, and up from 25 per cent in the second quarter of 2020.

The office sector is not much stronger outside of Calgary's downtown. The Beltline came in at 24.6 per cent, while Calgary's suburban south has a 21.6 per cent rate and the north's rate is 19.3 per cent. There are 17 empty office buildings in Calgary five downtown, three in the Beltline and nine in the suburbs.

The COVID-19 pandemic, a lengthy economic downturn and Calgary having a larger number of offices per capita than other major Canadian markets have contributed to the continued increase.

Susan Thompson, research manager at Avison Young, Calgary, expects to see the vacancy rate continue to grow over the next 18 to 24 months as the real estate market adapts. The report projects the downtown vacancy rate could hit 30 per cent by the end of 2021.

"Basically, working on 30 per cent office vacancy is unprecedented. In a modern major office market, that's not a vacancy rate we've seen, possibly in North America," said Thompson.

Mayor Naheed Nenshi responded to the report by acknowledging the current numbers are bad, but said he has optimism they are set to improve.

"It's not going to be a wing and a prayer and hope that oil comes back that is going to fill the downtown core. We have a solid downtown strategy in place, it is the right strategy," said Nenshi. "It really is time for both the provincial and federal governments to come to the table and help fund it and make it real."

The mayor was referring to a $200-million investment and plan city council approved in April. That plan aims to create a better mix of residential and business space, draw in more private investment, and create more opportunities for amenities and entertainment in central neighbourhoods.

Despite forecasting further growth in vacancies in the short term, Thompson shared Nenshi's optimism for the future. She said the high rate presents lots of opportunity to redevelop the core, noting there has been a recent increase in commercial real estate activity.

"It takes a long time to make real estate decisions, you don't just snap your fingers and change your office environment," said Thompson. "We're likely going to see vacancy rise for another year or two . . . But, ultimately, we do see that the tide will turn."

She said landlords and tenants have already started to get creative with how they structure leases to afford more flexibility, and building owners are looking at how they can best utilize their buildings, whether that's repurposing or redeveloping them.

Strategic Group has been one of Calgary's first to enter the market into office conversions. It spent $25 million renovating what was once the Stephenson Building in Calgary and re-purposing it as "Cube" a residential rental apartment building with 65 apartment units. Ken Toews is vice-president of development with Strategic and said while conversions can be challenging, each project can divert thousands of tonnes of demolition material that would otherwise go to landfills. "It's really rewarding because the people really love the buildings, they love the environmental aspect, and we've been able to come up with some really good plans and make living really easy," said Toews.

The company has also converted other office buildings into non-residential uses, including a self-storage facility and the new Avenida Food Hall in Calgary. It's also in the process of redeveloping Calgary's iconic Barron Building downtown. "We need to revitalize downtown Calgary, and we would like to be part of that plan."

Q5. Assume that the current market for Aspen's 30-storey office tower comprises small businesses of fewer than 50 employees. Make an Ansoff matrix that displays potential for all four strategies.

Q6. You have been asked to help RocketSpace create a marketing plan for its new Calgary campus. You remember the process is a circular one, and you think it's best to draw it out and apply it to this situation. Draw the model and apply it to RocketSpace.

Q7. The City of Calgary wants to assess its current situation by offering citizens the opportunity to come to an event at City Hall and fill out a SWOT analysis for Calgary in regard to its downtown office building vacancy issue. You decide to head down and participate.

Provide your team SWOT analysis.