An inside look at how an oilpatch mega-merger could further hollow out Calgary's downtown office towers

With Zoom calls and work-from-home measures dominating work life for so many people this year, there has been concern in every major city about how that could reduce demand for office space.

In Calgary, where the downtown office vacancy rateis estimated to be as high as nearly 30 per cent, experts have been much more concerned about consolidation in the oilpatch.

Fewer companies means fewer workers. A smaller workforce means far fewer desks and offices.

"I have always been worried more about consolidation than I have the impact of COVID," said Mary Moran, with Calgary Economic Development, who described the merger as extraordinary.

"We are overbuilt by a long shot with respect to the amount of office space we have for the population we have. [We have] three and four times more than other cities around North America on aper-capita basis. We have twice as much as Toronto, so our problem is quite complex.

The mega-merger between oilpatch majors Cenovus Energy and Husky Energy was approved on Tuesday as shareholders of both firms voted overwhelmingly in favour of joining forces.

The deal is the most high-profile in a wave of consolidation in the city's dominant industry and the leading sector filling up the commercial skyscrapers.

Fewer jobs, fewer desks

Company executives are open about the impact the merger will have on the workforce, especially in Calgary. Both companies are headquartered in the city and there's no need for such duplication.That's one of the ways the combined company plans to find $1.2 billion in cost savings.

Already the companies have too much office space as rounds of layoffs were made since 2014 during the prolonged downturn in the oilpatch.

Combined, Husky and Cenovus will have about seven per cent of the total amount of downtown office space under lease, and have the most leased space of any private company, according to experts.

Cenovus has about two million square feet of leased space, according to the company. Staff were moved out of The Bow officer tower and into over one million square feet in Brookfield Place, but the company is only using about550,000square feet right now, according to Susan Thompson, a research manager with commercial real estate firm Avison Young.

Of the total lease commitments, Cenovus spokesperson Reg Curren said "a significant majority of that space being occupied by Cenovus as well as our subtenants. We continue to seek opportunities to sublease additional space."

Husky has about one million square feet of office space in the city's core, but is only occupying about600,000square feet in the north tower of Western Canadian Place, said Thompson.

Cenovus plans to cut up to 25 per cent of the combined workforce with Husky Energy after the merger, which would impact about 2,000 employees, the majority of them in Calgary.

Other recent deals in the sector include Canadian Natural Resources buying Painted Pony, Whitecap Resources buying Torc Oil & Gas and, in a separate deal, also acquiring NAL Resources Management from Manulife Financial. Further consolidation in the sector is expected.

The hole gets deeper

Greg Kwong, regional managing director for CBRE Ltd., a real estate brokerage company, said the impact of the merged Cenovus and Husky company moving into a single headquarters would be "significant."

"The overall magnitude of this deal is the big concern for the commercial real estate industry"as it will throw more sublease space onto the market,Kwong said in an interview.

"On a smaller scale, mergers and acquisitions have been happening for the last three or four years and will continue to happen. But something of this marquee is certainly unique."

CBRE pegs the vacancy rate for downtown Calgary office space at about 29.5per cent, which Kwong estimates is the highest rate in three decades.Less than a decade ago, vacancy rates in the core were around one per cent.

There are estimates that there are between 60,000 to 100,000 fewer people working downtown today than there were five or six years ago.

The higher the vacancy rates, the more pressure there is on rental rates.

The downturn in the downtown has also put pressure on the City of Calgary's bottom line. The value of the core's non-residential propertiesfell by more than $12 billion in three years, sinking city tax revenues by $300 million.

Not years, but decades

Commercial real estate is, more or less, a reflection of the economy, said Carl Gomez, chief economist and head of market analytics at CoStar, a commercial real estate informationfirm.

"The major source of demand for the office market in Calgary, but also the major source of economic growth for the Calgary economy, has been the oil and gas sector," he said.

"And so what the vacancy rates really just kind of reflects is, is the fact that the demand driver for the overall economy, the main producer of jobs, has basically consolidated, it's basically slowed down from its more voracious sort of pace from back in 2006 all the way to 2014. Its footprint has gotten much smaller."

He said the conundrum the Calgary office market faces now is locating the kind of demand that can replace the importance and the size of the oil and gas sector.

"Not to say that Calgary can't do it Calgary has got a very educated labour force, it's got a great quality of life to attract talent and attract people," Gomez said.

But he said the challenge is that filling up that gap isn't something that happens in the span of a couple of years, but can take decades.

"The risk here is that some of the vacancies in these buildings, this excess vacancy, may be structurally permanent and will need to be addressed over time as to what to do with it," he said.

Efforts are underway to attract new businesses into Calgary's core and to promote the growth of the local tech industry to backfill some of the space the energy sector has left behind. Some office properties have also been repurposed for other uses, like residential.