Open this photo in gallery The deep dive in the value of downtown Calgary's office space in is the latest fallout to hit a real estate market that has faced a series of economic challenges over the past five years. Chris Bolin Photography Inc./The Globe and Mail

Property values of Calgary’s downtown office buildings fell by 32 per cent in the past year amid high unemployment and a nearly record vacancy rate largely driven by the downturn in the oil sector. In contrast, home values remained largely stable, according to assessment data released Thursday by the city.

Calgary’s empty office towers have become a sore spot for the city’s finances and will lead to higher property taxes for commercial property owners and many homeowners outside of the downtown core, according to the city’s 2019 market assessment.

The deep dive in the value of downtown office space is the latest fallout to hit a real estate market that has faced a series of economic challenges over the past five years. Along with a struggling energy sector, which has eliminated tens of thousands of jobs in Calgary’s downtown, the city is facing significant overbuilding in its core and the risk of worsening economic doldrums as a result of delays in the construction of new pipeline capacity.

Story continues below advertisement

Because of the downtown vacancy rate, currently hovering around 30 per cent, there has been a “dramatic change” in the value of office space, according to city assessor Nelson Karpa. While the value of typical office space has fallen by 32 per cent, industrial spaces had a 4-per-cent drop. Retail properties were unchanged.

Some of the city’s most expensive office towers saw their values plunge last year, according to a list released by city. For example, the Bow Tower, which opened in 2013 and now dominates the city’s skyline, lost 19 per cent of its value, falling to $779-million from $957-million. Fifth Avenue Place, previously known as Esso Plaza, saw its property value drop by 46 per cent to $231-million from $429-million.

House values were relatively stable and fell by 1 per cent, according to Mr. Karpa. Overall home sales dropped by 14.5 per cent in 2018 compared to the previous year, according to a report released by the Calgary Real Estate Board on Thursday. Owing to a large number of homes on the market, the city’s benchmark prices for houses also fell by 1.5 per cent year-over-year.

The city’s 2019 assessment is based on the value of properties on July 1, 2018. However, oil prices have declined significantly since then and the Alberta government has implemented a mandatory cut to oil production. “We also understand the market has changed and any changes will be reflected in next year’s assessment,” Mr. Karpa warned.

As recently as 2015, downtown Calgary’s non-residential tax base was responsible for nearly one-third of the city’s revenues. In 2019, with the city council having approved a 3.45-per-cent property tax increase, downtown commercial properties are expected to only cover 19 per cent of the city’s tax haul.

Greg Kwong, the Alberta managing director for commercial realtor CBRE, said the decline in Calgary’s downtown real estate values is an overdue correction.

“When oil prices went down in December of 2014, property values didn’t drop enough over the following three years. I think the city might be catching up and facing [this] reality,” he said.

Story continues below advertisement

Calgary dipped into its savings fund in recent years to reduce the tax increases on businesses, but Mayor Naheed Nenshi has warned that the city can’t afford to continue keeping a lid on tax hikes.

The real culprit according to Mr. Kwong is Calgary’s elevated unemployment rate, which was 7.9 per cent in November, according to Statistics Canada. After years where Calgary enjoyed one of Canada’s lowest rates of unemployment, it is now far above the national average and second only to St. John’s, among the country’s larger cities.

“The disease is the unemployment rate, the symptoms are taxes, low property values and vacancy rates,” he said.