Why Calgary developers face a long haul to dig out stalled office projects

It could be a long haul for developers in Calgary who are trying to get their stalled office developmentsback on track, with six sites on the city's official list and more expected to be added soon.

Among them is CentronGroup's Place Ten at 524 10th Ave. S.W. It's behind by at least one year, according to Michael Anderson, the Calgary-based company's senior vice-president of development and leasing.

The 600,000 square-foot east tower was officially added to the city's list of stalled construction projects in July2016.

Anderson said they've only hit the pause button and there are plans to re-start constructionas soon as they find enough tenants to occupy the proposed 14-storey tower.

• Where are the stalled or abandoned developments on the city's official list? See the map at the bottom of this story

The other five sites on the city's official stalled or abandoned projects list consist of:

• Remington Development Corp.'sWestwinds Phase II at 3687 63rd Ave. N.E.
• Mountain View Park's sitesat400& 500 4000 4th St. S.E.
• Part of Melcor's The District at11160 14th St. N.E.
• The One development at201-10th Ave. S.E.

'Our office portfolio won't grow anytime soon'

The One development is a holdover from the city's last downturn in 2009 and was acquired by the Strategic Groupin 2014.

"In a word, yes, we're moving forward with that site,"saidRandy Ferguson, the company's chief operating officer.

However, Strategic has scrapped plans for a mixed-use building with office and residential. It's now pitching a 37-storeyapartment rental tower to the city's planning and development authorities.

"If the city is supportive of our plan, we'd like to see our permitting in place by late this year and we'd like to see construction start in March2018," said Ferguson.

"Our office portfolio won't grow anytime soon."

More projects unofficially seem stalled

The city says it will add the Arlington Street Investments projectBritanniaBlock LP/The Windsortoits suspended sites list if nothing positive happens for the property owner and they do not get another contractor.

A banner hanging at the site which isat the corner of Elbow Drive and50thAvenue S.W. reveals few details about the project other than the phrase "#NotAnEmptyPit."

However,Arlington said in a statement Britannia Block LP/The Windsor will go ahead as a retail/residential project.

Thecompany added they have leased out all of their retail space, secured construction financingand will move forward "assoon as pending development and building permits are issued."

It's pretty clear work has stalled out at some other sites.

For example, RemingtonDevelopment Corporation's Quarry Crossing II on 24th Street S.E. hasn't seen work in nearly two years since the stairwells and elevator shafts were erected.

Security deposits helping reducestalled projects, city says

Nonetheless, there are fewer stalled construction projects in Calgary during this downturn compared to the last slump in 2009 when the city officially listed 26 stalled or abandoned developments.

One possible reason: Since the last downturn, the city tried to create an incentive to ensure developers at leastfill in the massive excavation pitsbefore they walk away from projects.

Calgary introduced mandatory security deposits that developers must pay at the start of a project, amounting to about $25 per cubic metre of soil removed from a site.

Then, if a project goes sideways, the city can use the deposit to pay for the costs of filling the excavation pit ifneeded.

For example, MelcorDevelopment was unable to complete part of its "The District" development on 14 Street N.E.but brought the unfinished project up to grade and capped the single floor underground parkade. So it would have recovered its deposit.

It's unclear whether the city's security deposit played a role in Melcor's decision to bring the project to grade level and thecompany did not return calls to discuss the project's future.

However,Randy Reid,an operational supervisor with the city's building inspections department, says he believes the deposit system is making a difference with companies compared to during the last downturn.

"I believe people are a little more cautious," said Reid. "There's a little more at stake."

However, Anderson of the Centron Groupwarns the city not to place an undue burden on developers, while at the same time saying he understands the city's desire to safeguard the public interest.

Hesays Centronhad to hand over $1.6 million for Place Ten's security deposit.

"Extraneous cash calls can be prohibitive to new projects going ahead," he said.

Soaring vacancy rate seen as bigger problem

Others say the real concern right now isn't the number of stalled or abandoned projectsbut the soaring vacancy rate among existing buildings in the city's commercial core.

Commercial real estate firmCresa, which onlyrepresents commercial tenants, pegs the current office vacancy rate at 24.5 per centand climbing.

"I don't think we've bottomed out," said Adam Hayes, a broker withCresa.

He predicts a two- to three-point climb later this year or in early 2018.

He says that's when the supply side will become crystal clear with two new projects coming on stream, Brookfield Place and Telus Sky.

Calgary city Coun. Evan Woolley has two suspended sites in his ward south of downtown, Ward 8, but agrees that the commercialvacancy rate is the bigger challenge.

"We've got Calgary Economic Development working extremely, extremely hard travelling all over the world talking to the best and brightest, we have a real estate committee working on solutions to this and I remain hopeful," said Woolley.

Even more supply could come onto the market after two blockbuster deals in the oilpatch:

• Canadian Natural Resources Ltd. announced it was buying some of Shell's assets.
• CenovusEnergy announced the purchase of ConocoPhillips oilsands assets. ConocoPhillipsholds an estimated 820,000 square feet of office space in Calgary.

And the overall vacancy numbers don't include so-called ghost vacancies where companies still hold onto office space that was occupied before the downturn that caused thousands of layoffs.

Could be 'years' before tenant demand climbs high again

Hayes says he's not surprised to see the number of stalled construction projects, given high vacancy rates and falling rent and lease costs.

He says it could be a while before those projects or new ones get off the ground.

"It could be years and years and years before we see tenants able to justify costs associated with new development."

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