Business·Analysis

Oilpatch downturn has cost Calgary $300M in tax revenue from downtown offices now sitting empty

After years of leaning on downtown's office towers to cover a healthy chunk of municipal tax revenue, Calgary's politicians are facing tough decisions thanks to a large number of vacancies.

No easy remedy for city's revenue woes as office towers could take years to fill up again

After years of leaning on downtown's office towers for tax revenues, it appears it will be years again before the City of Calgary can do so once more. (Robson Fletcher/CBC)

For years, Calgarians could rely on the sky-high value of their busy downtown office towers to help cover a healthy chunk of municipal tax revenue.

But with the downturn — and thousands of layoffs emptying out oilpatch offices — the value of the core's non-residential properties fell by more than $12 billion in three years, sinking city tax revenues by $300 million.

Big drops in property assessments mean fewer tax dollars flowing from downtown office towers, but the city still has the same revenue demands.

That shortfall needs to be made up — and that's putting political heat on local councillors and creating concern for businesses outside the core now faced with picking up the slack. 

More than half of business property owners in Calgary are facing property tax hikes higher than 10 per cent this year.

If there was still any hope that a bounce in downtown office vacancies might provide a salve — one that could help city council kick the issue down the road a little longer  —  that is looking like wishful thinking.

Experts are not forecasting a sharp rebound even with things moving in a more positive direction recently.

A for lease sign is seen in downtown Calgary in January. Calgary's commercial and non-residential properties have lost $12 billion in value in the past three years. (Bryan Labby/CBC)

"We're looking at very, very, very conservative [economic] growth over the next, certainly, five years," said Greg Kwong, Alberta regional managing director of CBRE, a real estate brokerage company.

"We don't see a huge drop in vacancy, although we do believe that the worst is behind us."

The "worst" was pretty ugly, though.  

When the oil boom was still rocking Calgary in the fall of 2012, the same downtown vacancy rate was reported to be hovering around four per cent and under.

CBRE reported downtown office vacancies approached 28 per cent at their peak last year.  

It appears the rate has come off last year's highs but downtown offices have still been pegged at roughly 20 to 26 per cent vacant, depending on who you ask.

It's a reflection of the economic — and some argue political — outlook for the city and the oilpatch.

"The question is, 'How fast is the expectation for the economy to rebound in Alberta?'" said Roelof van Dijk, a director of market analytics at CoStar Group, in an interview from Toronto.

Van Dijk notes forecasts for slow economic growth in Alberta this year, ongoing issues with getting pipelines built and continued employment challenges. Some outlooks call for a rebound next year, he said.

Calgary Mayor Naheed Nenshi said if council approves a new proposal, which will use $70.9 million for rebates to business properties, it will result in a virtual tax freeze this year for those property owners. (Christopher Katsarov/The Canadian Press)

But van Dijk said it could still take "a long time" before a return to the kind of market Calgarians saw at the start of the decade. For one, Alberta will still have to contend with external factors, like trade disputes and growing U.S. oil production, which might also alter the province's economic outlook.

Kwong believes the biggest challenge affecting the downtown has been "bad politics," which have impeded the energy sector by either making no decisions or bad ones.

He said a lot of people will be watching to see what the federal government decides to do with the Trans Mountain pipeline expansion, a decision expected to come later this month.

Regardless, city council faces some difficult decisions. 

On Monday, it will debate a property tax rebate package for business property owners outside the core who are facing large tax hikes as the tax burden shifts away from the downtown.

Mayor Naheed Nenshi said if council approves the initiative, which will use $70.9 million for rebates to business properties, it will result in a virtual tax freeze this year for business property owners.

It follows council's decision the past two years to use rebates to limit tax increases on businesses.

The problem isn't new. Even worse, it doesn't appear to be going anywhere.

In recent years, the city council has made cuts and found savings to the tune of hundreds of millions of dollars. There have been hundreds of layoffs; jobs have gone unfilled.

Now, with downtown facing a long climb back, council could be pushed to go further to reduce taxes. There's talk about the need for a deeper discussion about structural change that shakes up the city's four-year budget plans and could lead to cuts in jobs and services.

That talk may be inevitable because after years of leaning on the downtown for tax revenues, it appears it will be years again before the city can do so once more.

With files from Scott Dippel

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