Calgary industrial real estate vacancy drops, construction rises

Cushman & Wakefield forecasts the market to remain active in 2019 despite uncertainty surrounding the energy market and politics

Calgary’s industrial real estate market continues to put up some impressive numbers.

A report by Cushman & Wakefield said the city’s vacancy rate dropped to 7.6 per cent in the first quarter of this year compared to 7.7 per cent a year ago.

Net absorption – the change in occupied space – was just over 1.6 million in the first three months of 2019, soaring from 327,387 for the same period last year.

There was just over 3.1 million square feet of industrial real estate under construction compared with just over 1.8 million square feet in the first quarter of 2018. And average asking rent is $9.46 per square feet per year, which is up from $9.05 last year.

“Leading the demand for industrial space is e-commerce and distribution tenants who are expanding and upgrading to properties with greater efficiency,” said Brent Johannesen, vice-president of industrial sales and leasing for Cushman & Wakefield’s Calgary office.

The report said construction projects being built on speculation (without tenants in place) has slowed since 2016, although these projects did see a rebound in late 2018.

“Toronto, Vancouver and Montreal have historically been the cities to invest in industrial property; however, Calgary has proven to be a hot commodity and is trending higher. Behind the demand for industrial space are e-commerce and the distribution sector, as tenants are seeking state-of-the-art distribution and warehouse space with greater efficiency as the key driver,” explained the report.

“Calgary’s secondary and tertiary markets are also experiencing heavy demand, which has resulted in tighter market conditions and rent growth. Since the beginning of the oil price downturn in 2015, industrial operating costs weakened to $3.61 per square foot (psf) in the second quarter of 2016, but have steadily increased since; currently sitting at $4.59 psf. Net asking rents over the downturn bottomed out at $8.71 psf in the second quarter of 2017, but have slowly recovered and took a larger leap in the first quarter of 2019 to $9.46 psf – largely driven by the arrival of new supply.”

The report said the current market is proving difficult to read with an uptick in activity but no real sense of urgency for deals to get done.

“As the economy is still based largely on oil prices, pipeline disputes will continue to hamper energy investment although the transportation and warehousing sectors are expected to excel in the near term,” it said. “Cushman & Wakefield forecasts the Calgary industrial market to remain active in 2019 despite uncertainty surrounding the energy market and politics. The new provincial government elected and federal election this fall will ultimately influence the economy but activity is expected to be business as usual; maintaining a slow recovery over the year.”

The report added that there is another 4.8 million square feet of new construction currently in the planning stages.

“Despite the new supply, vacancy rates are estimated to continue to decrease through strong levels of leasing activity and absorption. Cushman & Wakefield forecasts a measured strengthening in rental rates across all markets over the next 12 months with a continuing slow recovery from 2016 lows,” it said.

– Mario Toneguzzi for Calgary’s Business

industrial real estate

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