I recently visited Calgary in Alberta Canada. Calgary has grown considerably since I was last there in 1979. The cosmopolitan city is filled with numerous skyscrapers, and owes its rapid growth to its status as the center of Canada’s oil industry. It’s a city where the architecture gives a blueprint of its period of successes.
Calgary historically is a boom and bust city. It booms when oil prices are high and busts when oil prices are low. Its architecture is reflective of the years of explosive growth. Cranes were in the air all over town building offices and residential condos. Like most major cities, the construction of buildings takes years to plan, receive necessary approval, and ultimately occupy with tenants. Eighteen months ago, Calgary saw their latest boom market fade away. Office vacancy at its lowest point it less than four percent. In just 18 months, the office vacancy has hit 21 percent. Unfortunately, once construction begins, it cannot be stopped. Therefore, on top of this high vacancy rate is several million square feet of new and vacant office and residential space.
To most, San Francisco is not a boom and bust marketplace. But in fact, it is. I entered the San Francisco office market as a commercial real estate broker in 1984 and I have seen several boom and bust markets within that timeframe that have transformed our city with several new developments.
In order to jump start a very poor US economy, President Reagan created tax benefits to create construction and ultimately create more job opportunities. But in the middle of this expansion, congress had changed the tax laws, which created a savings and loan collapse. This lead to a cratered office market. San Francisco saw its vacancy jump from a low of two percent to 26 percent in less than 18 months.
The dot-com market created the next major development growth cycle in San Francisco, but this didn’t happen for another 13 years or so until 1997. At its peak, office vacancy was less than two percent and residential vacancy was less than three percent. Less than one year after the dot-com downfall, office vacancy hit 24 percent and residential vacancy hit 10 percent. Office rental rates plunged from a high of $97.00 per square foot to a Class A office space averaging $32.00 per square foot. Class B office space suffered the most, dropping from $75.00 per square foot to less than $21.00 per square foot.
Recently, Cushman & Wakefield announced the latest office vacancy rates in San Francisco. Office vacancy in the city has moved up to 7.1 percent– the first time increase since 2009. However, this office vacancy rate did not take into account the large-scale number of subleases that have entered the market place as tech firms have been shredding office space at an alarming rate. Similar to Calgary, their 21 percent vacancy rate in office is actually based upon strictly direct vacancy space, not sublease space. Large oil companies have flooded their market with sublease space that is now competing against direct space options.
Our current tech boom has lasted five years, one year longer than the previous boom. Fiscal cycles do happen, but San Francisco should look into markets like Calgary to plan for its immediate future.