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Calgary industrial: Absorption stays high, but vacancy increases

Region forecast for 3.5M sq. ft. of leasing growth; deliveries move market toward balance

Ryan Haney, executive vice-president, industrial practice lead, JLL. (Courtesy JLL)
Ryan Haney, executive vice-president, industrial practice lead, JLL. (Courtesy JLL)

The industrial real estate market in the Greater Calgary Area continues to be strong, but signs are pointing to a slight increase in vacancy rates as the sector moves further into balanced territory.

Ryan Haney, executive vice-president, industrial practice lead, for JLL, told the Calgary Real Estate Forum on Oct. 11 there has been close to 1.5 million square feet of absorption in the market through Q3 2023, while the vacancy rate has edged up 40 basis points to 2.0 per cent.

Haney said 6.6 million square feet of space remains under construction.

“Companies from Vancouver and Toronto continue to expand into the Calgary and the GCA market to capitalize on favourable rents and location in comparison to the other major Canadian cities,” according to JLL’s Q3 market report.

“Furthermore, as commercial driver regulations limit drive time to 13 hours in a 24-hour period, many companies have chosen Calgary to serve as their distribution hub to service other major Canadian cities such as Vancouver, Edmonton and Winnipeg within the same-day drive time requirement.

"This positions Calgary well for continued future growth.”

Over one million sq. ft. of new space so far in 2023

The report said over one million square feet of new construction has been delivered this quarter, of which 76 per cent consisted of big box product over 100,000 square feet delivered by ONE Properties and CT REIT (350,000 square feet apiece).

Pre-leasing activity remains strong and is expected to increase in Q4. Forecasts indicate there will be an additional 2.8 million square feet completed, of which 1.3 million square or 46 per cent is pre-leased. 

“As a result, this forecast estimates total annual net absorption to be in the 3.5-million-square-feet range at the end of Q4 which is in line with the historical average of 3.45 million square feet. This will place upward pressure on vacancy rates due to the amount of new forecasted construction being delivered,” said the report.

"It is also noted that Balzac represents 59 per cent of new product delivered this quarter and represents 44 per cent of new product currently under construction.

“While Calgary is trending towards a balanced market, which is estimated to be between four per cent to five per cent, it remains healthy and is well-positioned for further growth. Taking a more granular look into the market, it was noted that of the 3.4 million vacant square feet on the market, 24 per cent of the vacant space is over 100,000 square feet, 37 per cent was between 25,000 square feet to 100,000 square feet and 40 per cent of the vacant space is below 25,000 square feet. 

“Average asking net rental rates in Q3 rose to $10.89 per square foot which results in an increase of $0.12 per square foot, or 1.1 per cent in comparison to last quarter and an increase of $0.39 per square foot or 3.7 per cent year-over-year.

"Annual rate escalations have become a common expectation by landlords as demonstrated by the majority of recent lease transactions. Regardless of the rapid rise in interest rates, demand for owner/user sales remains high as there is very limited inventory available on the market.”

Two years of significant leasing rate increases

At the Calgary forum, Aurora Elliott, leasing director, Alberta industrial for Choice Properties REIT, said the market is into its second year of rental rate increases. 

While tenants don’t like the increases, she said, the market is tight. Choice is successfully renewing leases and if vacancy does come up there continues to be robust demand.

“The conversations are tough and again nobody wants a 30 or 40 per cent rental increase but they do seem to be absorbing them and finding ways to make the business work for them,” said Elliott.

She said she sees rental price growth continuing for the next 24 months.

“I think second-generation product is still incredibly attractive,” Elliott noted, saying the rent spread between existing product and new is significant.

Mike Bonneveld, president of Skyline Industrial REIT, said Calgary has been late to the rental price growth experienced in other Canadian markets.

Many companies have operations in Toronto, Vancouver and Montreal and started experiencing rental increases 24 to 36 months ago.

Rocky View Count remains a hot spot

Rocky View County, and particularly the Balzac area just north of Calgary’s city limits, continue to be a hotbed of activity. 

Phil Brown, vice-president, acquisitions and leasing, industrial, for Hopewell Development, said property tax disparity between the city and the county is driving the market.

For example, Balzac has become home to many larger distribution centres. As a result, the property tax differential for users that are 150,000 square feet or more “is a big deal” and the county “seems to be the best option.”

Bonneveld said three or four years ago Skyline’s portfolio was about eight million square feet predominantly in the Greater Toronto Area and southwestern Ontario with some in Alberta and a portion in Montreal.

Today about 50 per cent of its portfolio is in Alberta and about 22 per cent in Quebec.

He said in 2020-'21, a decision was made to sell much of its small-bay and older buildings. 

“Our view was back in 2020-'21, if we were going to get a downturn and softness within the industrial space from an investment standpoint, the softness would occur in that older, small-bay product,” Bonneveld said.

“So we ended up selling about half a billion dollars worth of real estate between the end of 2020 and the beginning of 2023. A large part of that was Ontario and where we saw opportunity was out in Alberta.”

Sean Day, vice-president, industrial for Anthem Properties, said the Vancouver-based company, which has land and projects in both Calgary and Balzac, saw similar opportunity in Alberta.

“There was available land. There was cheap land. We saw there was this compelling rental growth story,” he said, “and that was a big driver. Alberta is the heart of our industrial program.”

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