Calgary’s soon-to-be tallest tower could come up short on tenants

CALGARY – A brand new skyscraper rising over Calgary will be the city’s tallest when construction is complete the coming year, but it’s unlikely to be full.

The $1.3-billion building’s largest tenant, oilsands producer Cenovus Energy Inc., confirmed this week it wouldn’t need the quantity of space it had previously agreed to occupy in 2013, when oil prices were comfortably trading above US$90 per barrel.

“We don’t need just as much space once we initially thought,” company spokesperson Rhona DelFrari said.

Related

‘It’s a mess:’ Oil crash creating graveyard of wells abandoned on Albertans’ landCenovus Energy Inc slashes dividend, cuts spending and jobs as loss deepens a lot more than expectedRisks to Canada ‘substantial’ if oil stays below $50 for next five years, BofA warns

In the 1990s, investment bankers coined the term “the skyscraper curse” to explain the way the construction of record-setting towers frequently coincided with recessions, and listed New York City’s Empire State Building as the most recognizable example.

Calgarian examples include the Bow, which was being built throughout the 2008 recession, and today Brookfield Place is rising just like oil prices are heading down.

Cenovus had decided to lease 71 per cent of the 1.4 million square feet of office space within the 56-storey Brookfield Place building, which is set to eclipse the crescent-shaped Bow tower because the city’s tallest building.

They have to be looking at the one million square feet and saying, ‘that’s the last thing we need

The company confirmed it’s actively attempting to sublet work space it occupies, but wouldn’t say whether which includes its corporate headquarters at the Bow or its planned new headquarters at Brookfield Place.

Asked whether Cenovus was attempting to wriggle from its deal to lease in Brookfield Place, president and CEO Brian Ferguson said: “What I’m able to say- we’re taking a look at how we could reduce and improve costs in all aspects of our business, including leasing costs.”

“Beyond that, I can not enter into specifics. We are actively looking to sublease some space now, but that’s all of the space we are looking at,” Ferguson told the Financial Post.

Cenovus reported its fourth quarter results Thursday and announced it would further reduce staff to outlive the collapse in oil prices, which remained below US$30 per barrel now, despite a 12 per cent surge on Friday. In a U.S. Filing filing the organization said it may sell as much as US$5 billion of stock, debt or any other securities.

The company had let go 1,500 people this past year.

Despite the lower headcount, DelFrari asserted the organization would be honouring its leases.

Brookfield REIT’s vice-president of communications Melissa Coley said her company’s policy “is never to discuss tenants.”

Paul Finkbeiner, chief executive of GWL Realty Advisors, which has more than $15 billion in assets under management, said you just can’t break a lease.

“What you do is try to negotiate out. Let’s say you sign a 15-year lease, you go to the landlord and say, ‘I’ll pay for five years but I’ll leave. When you get someone within five years, you make money.’ The actual question is whenever you think the market is and when are you able to lease,” he said.

Given the state of the Calgary office market, it seems unlikely Brookfield would have much incentive to renegotiate any of its tenants’ leases.

While Cenovus looks for other companies to take up the space n’t i longer needs, the subleasing market in Calgary has slowed considerably.

“You laid off how many people, cut your dividend and today you’re doing an equity raise?” independent real-estate consultant Ross Moore said of Cenovus. “They need to be looking at the a million square feet and saying, ‘that’s the very last thing we need,’ even when it is two years out (from completion).”

Research on the Calgary office space market from Avison Young noted that, within the fourth quarter of last year, “the amount of sublease space has risen as companies make an effort to cut their expenses, leading to significant increases in vacancy rates citywide.”

Calgary’s downtown vacancy rate jumped four per cent over the course of your fourth quarter and now sits at around 16.3 per cent, based on Avison Young.

With files from Garry Marr

gmorgan@nationalpost.com
Twitter.com/geoffreymorgan