The third quarter of 2022 was a good news, not-so-good news story for commercial real estate in the Edmonton region.

Real estate reports from NAI Commercial Real Estate Inc., and Avison Young show the industrial sector continues to be healthy while the office sector faces troubling trends – despite at least one significant new lease at one of the premium downtown towers.

NAI president Chad Snow said larger developers in the industrial space are building now following the doldrums of the COVID-19 pandemic as demand continues to be strong, particularly for warehouse and distribution space.

The NAI report spotlights more than 1.4 million square feet of industrial space construction starting in Q3 2022. The vacancy rate for the greater Edmonton region fellow to 3.6 per cent in Q3 from 4.2 the previous quarter. 

The Leduc-Nisku area south of the city saw vacancy slip from 5.7 to 4.7 per cent and rental rates rose slightly to $10.17 per square foot.

Office sector remains challenged

Office vacancies remain high in Edmonton and experts predict they will continue at those levels, or possibly increase.

Cory Wosnack, principal and managing director with Avison Young Edmonton, said there will be a slow increase in people coming back to the office after the pandemic, but at the same time there will be an increase in vacancy rates. 

Avison Young’s Q3 report puts Edmonton’s overall office vacancy rate at 17.5 per cent, with the downtown figure clocking in at 18.2 per cent.

“We have a nice boost to downtown activity . . . as (workers) reclaim the comforts of the office and social experience is becoming appreciated again, but at the same time we have large occupiers who are going to put the space they are ineffectively using back into the marketplace, or returning the space to the landlord when they renew their lease or relocate.” 

He said Edmonton’s core, particularly around Rogers Place in the ICE district, is becoming a social centre as opposed to a business centre.

That heightened social vibrancy and the improved amenities in newly constructed towers is attracting office tenants investing in quality property to attract workers, he suggested.

New leases in the offing

He said 100,000 square feet of commercial real estate deals are about to be announced in the ICE district.

Included in that, Law firm Bennett Jones is in the space planning process on its new lease of close to 50,000 square feet of space on the 14th and 15th floors of the district's Stantec Tower, Bennett Jones communications advisor Peter Zvanitajs confirmed in an email to RENX. 

No other details were immediately available, but Wosnack noted firms are looking for their office space with a different formula - more unassigned seating, more common space and more amenities.

The NAI figures for office vacancy differ from Avison Young’s, showing downtown vacancy at 11.7 per cent, up from 10.1 per cent in 2021 Q4. The overall Edmonton region vacancy is 9.6 per cent. NAI partners with research firm CoStar, which uses a different methodology to calculate vacancies.

The NAI report shows a similar trend to other real estate firm assessments. While not as high as Calgary, Edmonton office vacancy is well above that of Toronto or Vancouver.

“We don’t like what we see downtown, but I don’t think our vacancy rate is alarming given what’s occurred,” Snow observed. “I don’t think this is the end of office . . . it’s a great opportunity for a business that wants to own its offices.

"Five years ago, they had very few options and would be forced to pay well in excess of $250 to $300 per square foot before doing improvements inside the space. Today, you can find space for $200 to $250 a square foot with the improvements already in place.” 

The Edmonton industrial/distribution sector

Snow says new light industrial and distribution entrants into the market are arriving because the markets they’re coming from are experiencing very low vacancy or higher prices than Edmonton.

Companies already in the market are looking to expand their inventory models and seek more space, he added.

“They are looking to keep their inventories ashore and they don’t want to rely on the at-once supply chain . . . If you’re an appliance company, you used to run on one season (of inventory). Now some companies are expanding their facilities to project out farther and have landed inventory to satisfy their sales needs for an expanded amount of time.”

Snow says he wouldn’t predict that leases will increase significantly. While leases aren’t immune from inflation, he said landlords are happy to keep rents stable to keep spaces full, rather than incur the costs of tenant turnover.

While activity is strong in the west side of Edmonton and the Acheson business park west of Edmonton, the northeast area of the Edmonton region has seen a slight slump, with vacancies rising from 4.2 to 4.8 per cent quarter-over-quarter and lease rates dropping below $10 per square foot, according to the NAI report.

The announcement earlier this month of $476 million in federal and provincial funding for a new Air Products hydrogen and carbon capture project in the Industrial Heartland area northeast of the city will take some time to spur industrial growth in that region, Snow said.

“Once it gets through engineering and things proceed in terms of plans . . . that’s when the market understands what kinds of jobs and services are needed to create that project,” Snow explained.

Some suburban retail faring well

Sherwood Park and Fort Saskatchewan, east and northeast of the city, respectively, show strength in the retail sector in the NAI report, with vacancy slipping to 3.5 from four per cent last quarter.

Leduc, south of Edmonton, also shows retail vacancy declining to 1.2 from three per cent.

Snow said there is some retail construction underway, much of it in new neighbourhood centres and strip malls. Consumers are more spread out and shopping closer to home, he said.

The central Edmonton retail vacancy rate was at six per cent in third quarter, which is close to where it has been sitting all year.