Debt Digest

November 2019

WHAT’S INSIDE:

• A look at how the Calgary economy has changed since the energy downturn began in Q4 2014
• Five data points that prove things are not as bad as they seem
• Charts highlighting job industry changes, retail sales, Calgary’s leading GDP per capita, downtown office space absorption trends
• Final thoughts - peak negativity be damned, Calgary is picking itself up and dusting itself off

INTRODUCTION

We leaned on our time in the trenches as equity research analysts for the title of our inaugural research topic as it seems very applicable to Calgary today. Times of “peak negativity” always flushed out investors searching for the bottom (of a stock or a commodity) and looking to exercise their right to “buy low & sell high(er)”. It’s a simple theory, but incredibly gutsy in reality as you are battling consensus opinions and herd mentality. Before you start wondering where we are going with this, hear us out…Calgary is at peak negativity. This shouldn’t be a surprise to anyone but still feels good to say the words out loud. The question is, where do we go from here? Are we at the bottom, are there rosier times ahead or is Calgary facing the dreaded “L-shaped” recovery?

DOWN WE GO

We all know how Calgary (and Alberta in general) arrived where we are today but just in case, here is a quick refresher so we are all on the same page… energy prices plummet, company cost structures are out of whack, access to capital vanishes and oil and gas expenditures drop by 2/3rds. Almost 5 years ago to the day the wheels were put in motion for today’s reality. Its been half a decade and Calgary’s change has been dramatic to say the least.

Some of the headline grabbing statistics over the past 5 years:

• As much as 30,000 Calgary area jobs lost in the oil and gas and manufacturing sectors
• Calgary unemployment rate hits a peak of 10.3% in 2017
• EI recipients for Alberta jumps 3-fold, with Calgary making up 35% of recipients
• Downtown office vacancy rates push over 26%
• Calgary economic region GDP contracted over 7% between 2015 and 2017
• The number of Calgarians employed in oil and gas sector has fallen 25% since the start of 2014

UP WE COME

No doubt Calgary has been through a lot and while many (most) are still feeling the hangover from late 2016/early 2017, the reality is the economy is not as bad as it feels. There are plenty of reasons to be optimistic, reminding us that Calgary is truly one of the most resilient cities in the country.

The next time someone tries to remind you how bad things are, here are some facts you can arm yourself with:

1. Calgary has the highest labour participation rate in Canada at 74%, unemployment trends continue to improve, Calgary alone has added nearly 40,000 jobs over the past year.
2. Economy is diversifying – Each year, we see roughly 1,200 additional small businesses in Calgary (net of closures). Small business per capita is second highest in Canada.
3. Job changes are happening – We are down 26,000 oil and gas/ manufacturing jobs in Calgary but those have been more than offset by increases in health care, education, accommodation and public administration positions.
4. Calgary has Canada’s highest GDP per capita and with net population growth of ~20,000 expected in 2019, population alone will add $1.2B to Calgary’s GDP (overall growth expected to be 1.5-2.0% in 2020).
5. Real Estate trends slowly improve. Downtown office vacancy is down 1% despite a 2.6 million sq foot increase in leasable space. Housing starts are expected to be up 1% in 2020.

JOIN US, OUTSIDE OF THE NEGATIVITY VORTEX

We are by no means turning a blind eye to the current realities in Calgary as unemployment remains well above historical norms and the Canadian average, 25% of the downtown office space sits vacant and consumer bankruptcies remain steady. But it certainly seems that for every bad data point there is a positive offset as Calgary continues to lead the nation in labour participation, GDP per capital and small business growth. The Calgary economy is successfully diversifying and that speaks to the resilience of the city.

Peak negativity be damned, fundamentals suggest Calgary is slowly grinding higher and while it isn’t the “V” shaped (or even “U” shaped) recovery akin to the past, it is definitely not the dreaded “L” shaped recovery many would have you believe. Peak negativity has us believing opportunity lies ahead, you just have to be selective on how you put that opportunity to good use.

Sources: Statistics Canada, City of Calgary Corporate Economics, The Conference Board of Canada, Avison Young