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Distribution fuels growth, challenges in Alberta industrial sector

Despite economic challenges brought on by the COVID-19 pandemic, the Calgary-area industrial real...

IMAGE: Marshall Toner, managing director and national lead, industrial with JLL. (Courtesy JLL)

Marshall Toner, managing director and national lead, industrial with JLL. (Courtesy JLL)

Despite economic challenges brought on by the COVID-19 pandemic, the Calgary-area industrial real estate market has held firm and is expected to remain a strong performer.

The overall vacancy rate has held fairly steady around the six per cent range, without the wild fluctuations experienced, for example, in Calgary’s downtown office market which is flirting with 30 per cent vacancy.

However, there has been a shift in the users of industrial real estate, a shift expected to continue into the near future. That is leading to some difficult questions for anyone owning or developing in Calgary – or across Alberta for that matter.

“I’m seeing a lot of service facilities on the market in Calgary, a bigger glut. I would say the last time we had this many on the market would be 2015, 2016,” said Marshall Toner, managing director and national lead, industrial with JLL, during a panel session at the recent Calgary Real Estate Forum.

“I believe distribution is what’s keeping us going in Calgary right now in some regard. Thirty-six-foot clear (ceilings), trailer parking. There’s an argument whether it’s dual-sided loading or single-siding loading.

“The three developers that are on (this webinar), I think that they would agree that there is a push – and even Edmonton is starting to see a little bit more distribution. Amazon has got their fulfillment centre up there. That was a big coup for Edmonton to get that (in) my opinion because that kind of product seemed to steer clear of Edmonton.”

Large-bay vs. medium- or small-bay industrial

He said due to Alberta’s position in the country, it’s likely to see further distribution centre growth. Toner expects it to come from companies already in the province as well as from newcomers.

The amount of activity has remained steady, and Toner said he’s “really happy” with the ongoing strength.

“I think we’ve been quite fortunate to weather the storm, maybe, better than we anticipated,” he said, though one sector is facing larger challenges. “I think the smaller-bay stuff is probably taking it on the chin a little bit more, just because there’s a lot of mom-and-pop operators where COVID has really squeezed their bottom line and it’s been tougher for them.

“But, overall I would say our industrial market in Calgary has been pretty healthy.”

Phil Brown, vice-president, acquisitions and leasing, industrial, said Hopewell Development has always built distribution-type product from mid-bay to large-bay.

“Our plans for the future aren’t going to change. I don’t think there’s going to be that much happening with those service buildings from a development standpoint, partly because there’s a lot of them available on the market,” said Brown.

“So if any user feels that that building fits, I think there’s that availability there. We’re seeing a lot of activity in larger-bay product, which in Calgary is mostly what we have.

“Also, it’s been active from that 25,000 (square feet) and up. That’s kind of where our focus is going to stay.”

Flexibility key to new industrial development

Dan Alexander, director, industrial leasing, with Oxford Properties, said when it comes to new development, flexibility is the key unless companies are constructing build-to-suit structures.

“If a manufacturer needed to get in there, we’ve got good power. If an e-commerce user wanted to go in, good ceiling heights, good loading courts, trailer parking. I just think you have to be super flexible if you’re building.”

Matthew Woolsey, president of York Realty Inc., was blunt in addressing the service sector.

“The service-type facilities suck right now,” he stated. “We’ve got one in Calgary that we built and it’s really tough. We’ve been lucky to get out of most of, call it older property, we had in Nisku (Alta).

“I wonder what happens to a lot of that ’70s and ’80s vintage product that’s in Nisku which was long in the tooth 15 years ago. . . . It’s completely non-functional space.”

Even filling new properties targeted to the service industry is difficult, he said. He suggested older unused space might just be “reverted to land value less demo cost. It’s already serviced, so maybe there’s some advantages that way, (but) service building is not a bright spot right now.”

Brown said Hopewell is building 36-foot clear space in its current projects, but the question it’s going to debate for upcoming big-box product is whether to go to 40-foot clear on spec.

New builds present challenges

“We’re always looking at the trends in Toronto to basically see what users are demanding. A lot of that is coming from the requirements that (people) have in the market. I think 36 for big box is the minimum now,” he said.

“We just started another building in Calgary up in Balzac at CrossPointe (Industrial Park).

“We intend to start another building in Northwest Edmonton by the end of this year and hopefully a third in the spring, if we can continue with some leasing activity here in Calgary, with another big box. We’re bullish on that big product.”

Toner said if you look at trends coming out of the United States, COVID has greatly accelerated the growth of e-commerce, but there are some challenges.

“A pure fulfillment centre seems to have some different characteristics than just a standard DC (distribution centre),” Toner explained, referring to plenty of parking and ample power supplies. “That’s something that wasn’t considered in buildings prior to (now).

“You didn’t plan for 250 parking stalls in 500,000- or 250,000-square-foot buildings in the past. You didn’t plan for multiple services through the building with amperages of 6,000 amps so that they could run all the robotics.

“That’s something that has to be factored into this.”

Brown agreed e-commerce will continue to grow and expects more growth in Alberta due to its population base. The key is to gather as much info as possible based on what’s already happening in the sector and from prospective tenants

“Everyone talks about Amazon, but there’s a lot of other companies trying to figure it out,” Brown said. “But, it’s always a guessing game as to how you build these buildings.”

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