Calgary’s struggling economy may still be slowly recovering from the punishing recession years of 2015 and 2016, but the city’s industrial real estate market is booming.

Bentall Kennedy, Highfield Investment Group and Hillwood are building this 400,000 sq. ft. industrial property on spec in Rocky View County just outside Calgary. (Image courtesy CBRE)

Sean Ferguson, associate vice-president in industrial sales and leasing at Cushman & Wakefield in Calgary, said optimism is strong in the market.

Net absorption – the change in occupied space – was 1.3 million square feet in the third quarter of this year, up 32 per cent from 2017 and greater than the total results in 2015 and 2016 combined.

“We were all surprised by the amount of absorption that’s occurred in the last quarter here with some fairly substantial deals being done, expansions in the market,” said Ferguson. “We’re pleasantly surprised and it’s kicked off another wave of construction both in the northeast and in the southeast that we haven’t seen for a number of years.

“Construction runs across the board. Larger manufacturing facilities out on the east side of the city, down in the south area.

“Large, big distribution centres that are being developed by Hopewell in the southeast as well as out in the Balzac area on spec. Small-owner users. I think the rise in interest rates has had a substantial effect on activity in the user market as well.”

Year-to-date absorption 1.8M sq. ft.

According to Cushman & Wakefield, the city’s vacancy rate in the third quarter dropped to 7.11 per cent from 7.50 in the second quarter and 8.04 per cent a year ago. Year-to-date, absorption is 1.8 million square feet.

There was 821,388 square feet of new supply brought onto the market in the third quarter, pushing the year-to-date total to 914,684. Total inventory in the Calgary industrial market is 125 million square feet with 8.9 million square feet vacant.

“There’s no slowdown in sight,” added Ferguson.

Overall market numbers are being driven by large transactions, including new tenants like Amazon in the Balzac area. There have also been substantial expansions by firms such as Uni-Select, Mabe Canada and Kuehne & Nagel, focused in the distribution/logistics sector.

“Seventy-dollar oil hasn’t hurt,” said Ferguson of the city’s growing economy, “and there’s renewed optimism in the market. Also, we’re still seeing Calgary as the distribution hub for Western Canada and it’s really started to be driven by retail primarily. A lot of these retail distribution groups have been expanding pretty substantially.

“The service sector has come back quite a bit, too. Oil and gas fabricating, manufacturing is starting to trickle back and that was the biggest thing that we saw when we saw the downturn. These free-standing manufacturing facilities were all coming back to the market. And, slowly they’ve been absorbed.

“There’s still a few of them available out there and the uncertainty around tariffs and the trade agreements that may be imposed for steel and aluminum specifically is hurting groups, for sure. It’s not all roses out there, but generally there’s a lot more optimism in the market.”

Calgary businesses seeking CRE

Ferguson said a growing number of businesses are looking to buy commercial real estate in central locations like the Core Business Park.

The 5.6-acre business park has gradually this year been converted into industrial condos for sale by Vancouver-based developer PC Urban Properties Corp. The company has been renovating two aging industrial buildings, comprising 111,000 square feet, in the Burns Industrial Park along 58th Avenue S.E. and Blackfoot Trail.

Brent Sawchyn, PC Urban’s principal, said just over 50 per cent of the space has been purchased by 11 owner-users. About half that number has been by existing tenants. Uses are from small manufacturing, distribution and service companies.

“We are working through a program for the balance of the space in terms of sales,” said Sawchyn. “A couple of the units are vacant and ready for purchase.”

He said renovations are scheduled to be done before the end of November.

PC Urban bought the property from Morguard (MRC-T) for just over $16.1 million last year. When PC took over, there were 13 existing tenants in 24 units.

“I think the industrial market is quite strong,” said Sawchyn. “The vacancy rate within Calgary for industrial space has been falling quarter by quarter over the last year and a half or two years, probably because there hasn’t been a lot of new industrial space built in the last three years because of the energy recession. We’re seeing some pent-up demand which is having an effect on the vacancy rate as it goes lower.

“What we’re seeing is that local businesses in particular have emerged out of the energy recession feeling generally good about their future and feeling ready now to commit in terms of capital costs, improvements and investments in their businesses, either through expansion of space or what we’re seeing in Core Business Park . . . is people interested in exploring the opportunities of owning their own place of business.”