A shift in the demand side of the downtown office real estate market has taken place over the last six months, says a new report by CB Richard Ellis.

After four consecutive quarters of negative absorption -- the change in occupied square footage from one period to the next -- the downtown market is beginning to see some positive numbers with 31,564 square feet of absorption in the second quarter of 2008, according to the commercial real estate firm's latest market overview.

"Rising natural gas and oil prices, inherent since late 2007, are now significantly affecting downtown office demand," said the second quarter report. "Many companies are looking for additional space for expansion. Newly available capital is also allowing new start up companies to seek office space."In the sublease market, larger blocks of space are being absorbed by the larger oil and gas companies. The continued tight supply means tenants still have limited options, especially when requiring a large block of contiguous office space in the core."

There's no doubt the downtown office market is contingent on what happens in the oil and gas industry, said Greg Kwong, the real estate firm's regional managing director for Alberta.

"It's contingent on the oil and gas industry and how the real estate community reacts by adding new supply," said Kwong. "You can have strong growth in the oil and gas industry and equal growth in the office development industry and the vacancy rate stays the same. There's no pressure. It's just equilibrium.

"The last three years, the oil and gas industry obviously has gone through probably the biggest growth expansion that I've seen in 20 years and it really took the real estate community two or three years to catch up because it takes three or four years to build office buildings."

He said the demand going forward will continue to remain high as long as oil is above $90 a barrel.

There is clearly a correlation between downtown office space demand and the oil and gas industry, said Richard Pootmans, business development manager of real estate for Calgary Economic Development.

"The energy sector, and the related services to it, are the prime drivers of office space demand in the downtown core without question," he said, adding that the sector has by far the majority of office space in Calgary's central business district.

"We're also seeing growth in the financial services sector as well. And we're seeing a lot of interest as the capital budgets continue to increase for not only conventional, but also oilsands related development, and the staggering budgets for those projects. The financial services sector is also increasingly looking, from frankly around the world, (to locate) branches here and increasing the size of the offices they have here."

CBRE said the downtown office market currently has 5.6 million square feet of space under construction. Nine office developments are underway, four of which are 100 per cent pre-leased. The majority of those projects are expected to be completed in 2010 and 2011, adding two million square feet and 2.7 million square feet respectively to a downtown office market which currently has an inventory of 32.7 million square feet.