Leasing activity has slowed in the Calgary industrial real estate market, but the sector continues to have one of the lowest vacancy rates in the country at 2.1 per cent.
A CBRE report found the market had a modest start to 2023, recording 101,180 square feet of net positive Q1 absorption.
This is the first time Calgary has experienced a quarter below one million square feet of net positive absorption in over two years.
The report also found although Q1 saw the lowest new supply delivery since Q1 2020 at 179,105 square feet, the development pipeline remains robust. 5.6 million square feet of product is under construction, all slated for delivery by Q1 2024.
Of the product under construction, 41.3 per cent is pre-leased, with several other large-format transactions expected to be completed this quarter.
The report indicates 13 of the 15 under-construction projects of over 200,000 square feet were speculative buildings.
“Developers and associated financial partners looking to enter the next cycle of development are exercising extra caution given the current development cycle, macro-economic factors and construction costs,” CBRE's report states.
“With that said, Calgary is still under-building when compared to similar-sized U.S. markets.
"This is demonstrated by Calgary’s 3.7 per cent of total inventory development rate, versus 6.1 per cent of total inventory development rate as an average of the 23 most comparable U.S. markets.”
Calgary's industrial market remains active
Phil Brown, vice-president, acquisitions and leasing, industrial for developer Hopewell Development says Calgary’s industrial real estate market has been very active.
“I think coming out of COVID, North America-wide it’s been incredibly buoyant and tenant demand is as high as it’s ever been . . . in all markets and Calgary is kind of now no different,” he said.
“Coming out of early 2020 was a pretty scary time for everyone in all asset classes and I would say that industrial has been by far kind of the winner out of COVID.”
Brown said Calgary has become the benefactor of the three largest markets in Canada – Toronto, Vancouver and Montreal – with industrial vacancy at or below one per cent.
“We’re seeing a lot of national supply chain tenants like a Walmart or a Canadian Tire or a Home Depot if they’re looking for space today in their supply chain nationally; there’s not a lot of options in those other big markets and there are options in Calgary,” he said.
“So we’ve seen them growing here in Calgary because of the availability of product, because of entitlement and permit challenges in those markets.
"I think we’re benefiting from availability of product, we’re benefiting from much faster permitting time frames in the City of Calgary and Rocky View County, and then costs where we’re now half or even in some cases a third of what rents are in Vancouver and Toronto.”
Tenant demand not letting up
In the past 12 to 18 months, tenant demand has remained high and and developers continue building – including Hopewell. It has about 160 acres in the Citylink Logistics Centre in Rocky View County.
Hopewell recently completed a 540,000-square-foot spec building. It’s about 75 per cent leased with about 150,000 square feet available. A mirror-image building of the same size is under construction to be delivered next year.
Two other smaller buildings are planned and 80 acres of undeveloped land remains at the site. Brown said the development will eventually comprise 2.5 to three million square feet.
“We’re outside the city limits so we’re benefiting from that tax savings for tenants looking there,” he said. “We’re going to be building the first zero-carbon spec building in our portfolio for this Building 2.”
In the Balzac area of Rocky View County, just north of Calgary city limits, Hopewell completed a 565,000-square-foot building late last year.
It started on spec but was fully leased two or three months into construction. Brown said a multi-national retailer took that space, but it is not being publicly named.
It also built a 266,000-square-foot building on spec in Q1 which is fully leased to five tenants.
Hopewell has a 534,000-square-foot spec building under construction to be delivered this year as part of the Interlink Logistics Park. Another 660,000-square-foot building can be built next door.
In November, Cadillac Fairview announced the purchase of the 146-acre Rosemont Business Park in Balzac through a joint venture with Hopewell. The site will comprise 2.3 million square feet of industrial gross leasable area.
CF and Hopewell have confirmed plans to construct up to five buildings – occupying 45 per cent of available land area and featuring 40-foot clear heights – in phases between 2024 and 2029.
Weighing the risk of spec building
Brown said there’s always risk in building on spec.
“But if you talk to any developer in most markets in North America, you have to build on spec to be successful with industrial,” he said. “I think, traditionally, (with) industrial tenants the rule generally is that they’re not looking for buildings specific to them. Our buildings take from 18 to 24 months to design, get through permits and construct.
“If you don’t have product under construction or available, you miss out on a lot of transactions. The exception to that rule are obviously build-to-suits. We’ve seen Amazon come in and do build-to-suits. Obviously Walmart has built some of their own buildings, as has Canadian Tire," he said.
“Our view is the risk of building a building and having it available greatly outweighs just sitting on your land and waiting for a tenant to come. That’s just rare as far as we’re concerned.”
Building beyond the city limits
All of Hopewell’s current industrial construction is outside of Calgary city limits, in Rocky View County.
“Obviously we’re here in Calgary. Our head office for North America is Calgary. We love Calgary but specifically for large tenants, the cost savings in the property tax differential is significant,” Brown said.
“So if you’re a tenant, I used to say 200,000 square feet, but now I say even down to 50,000 and 80,000 (square) feet and up, when you can save . . . $1.50 to $2 a square foot on that property tax differential, it’s significant.
“If you’re even bigger, so if you’re looking at a half-million-square-foot building, on a 10-year term and you take $1.50 or $2 in rent, that’s a big gross dollar number of savings. And that’s why we’re building out there," he said.
"That’s where the demand is.”
No signs of letting up
Josh Magnussen, senior vice-president and partner of Colliers, which has been working with Hopewell to lease buildings in Citylink, said the market remains strong.
“Demand for space seems to be maintaining for all occupiers in all size ranges, largely fuelled by the warehousing and distribution of consumer products,” Magnussen said.
“We have seen demand taper slightly from last year and 2021. We attribute a few things to that. I think the one big one is I don’t think the growth we saw last year is sustainable for the leasing velocity we did.
"It was a record leasing year for our market and I don’t think we can expect to do that year-over-year.
“While we haven’t seen the same velocity of leasing this year, the basic fundamentals of our market remain strong.
"There’s demand from occupiers. Vacancy is low. We have it at 1.83 per cent and I think other brokerages would be around the same thing.
"The development community has fortunately reacted to that low vacancy and we are seeing product come online to help satisfy that demand. But a lot of that product has a lot of demand on it from Day One of hitting the market."
According to Colliers' Q4 2022 industrial market report, there were 11.7 million square feet of absorption in the Calgary market in 2022.
“We’re tracking eight million square feet of spec projects that are either under construction or recently completed and 80 per cent of that is leased," Magnussen said.
"We expect a continuation of the similar environment in the market for a little while here as demand remains strong and supply is catching up.”