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November 2018 Alberta Market Report

Courtesy of CoStar


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MARKET SUMMARY

The latest Canadian GDP growth data for August 2018, released on October 31, 2018, is of little solace for Alberta. Although, the Canadian economy as a whole grew by 2.5%, annualized in August, the economic recovery in Alberta has essentially been put on hold until the Trans Mountain pipeline issues are resolved. Although the August GDP growth comes on the back of a 1.9% increase in the oil and gas extraction subsector, the situation has deteriorated since then. Although the price of West Texas Intermediate (WTI) oil has increased to the high USD$60 per barrel, the discount between WTI and Western Canadian Select (WCS) has increased dramatically, with WCS now trading near the USD$20 per barrel mark. The decline could not come at a worse time, as the winter drilling season approaches and capital is needed. The problem is refinery and pipeline capacity, both of which are extremely limited. Even with all these headwinds, Alberta’s economy is expected to grow by 2.4% in 2018 and outpace Canada as a whole in 2019, which is only expected to see GDP growth near 2.0%. Employment growth also remains positive as the economy plays catch up from the 2015 recession. A projected drop in unemployment from 7.8% in 2017 to 6.6% at year-end 2018 appears to hold true with another projected drop to 5.9% in 2019. All of this positive economic activity expected in 2019 hinges on pipelines, and without them, these expectations will definitely need to be curtailed.


Further headwinds for the Alberta economy come in the form of higher interest rates. The Bank of Canada once again hiked their Overnight Rate, up 25 basis points (bps) in October to 1.75%, and with the banks forecast for strong GDP growth and relatively high inflation for Canada in general, they are expected to raise their Overnight Rate three more times in 2019, until it reaches 2.50% by Q3 2019. Minimal overall wage growth, relatively high inflation and rising interest rates continue to wreak havoc on debt servicing costs for households, weakening consumer confidence and forcing households to start making tougher decisions on how they spend. This has already started weighing on retail sales, which when you adjust for inflation, has decreased for three consecutive months.


Given this economic backdrop, the office, industrial and retail commercial real estate markets in both Calgary and Edmonton continue to stabilize and improve. The Calgary office market vacancy rate moved down 70 basis points (bps) year-over-year to end October 2018 at 15.1%, with overall availability down 110 bps over the same period to 17.9%, however, the average net asking rental rate continued to slide, down -17.9% year-over-year to $14.92/sq. ft./annum. The bigger story remains the delta between downtown and the suburbs. Downtown vacancy is actually down to 19.2% at the end of October, with availability now at 20.9%, compared to the suburban market where vacancy is up 20 bps year-over-year to 10.7%. Furthermore, net asking rents downtown have decreased by -28.6% year-over-year to $13.08/sq. ft./annum, which is now well below suburban average net asking rent, at $16.98/sq. ft./annum, which is down by only -5.8% year-over-year. Although total downtown vacant space continues to rise, downtown sublet space accounted for ‘only’ 24.5% of total vacant space at the end of October 2018, compared to 32.4% at this time last year, however, some of this decrease is due to space reverting to headlease. Expect office vacancy to continue increasing in the coming quarters with the delivery of approximately 760,000 sq. ft. of new supply at TELUS Sky, however, once this property is delivered to market, the development pipeline downtown will have completely dried up. Despite this, with the high availability rate, any rebound will be drawn out, with rental rates expected to continue edging down through 2020.


On the industrial side, Calgary’s vacancy rate at the end of October 2018 was 5.3%, down 120 bps year-over-year, however, rents were also down, but by only -0.6% over the same period, to $9.30/sq. ft. per annum. The Calgary industrial market is strengthening its status as a key Western Canada distribution centre, with the transportation and warehousing sector expected to grow by 4.0% in 2018. There is currently 3.9 million sq. ft. of industrial space under construction, however, this may not be enough to meet the demand in the market. On the retail front, despite Sears shutting down earlier this year, the retail market remains tight, with a vacancy rate of 2.7% at the end of October 2018, up 10 bps year-over-year, with the average net asking rental rate for retail space up 1.5% over the same period to $25.76/sq. ft. per annum. High debt levels combined with households in Alberta still trying to rebalance their budgets following the recession, continues to create a drag on retail sales. Increasing interest rates and the fall out in consumer confidence following the newest delays in the Trans Mountain pipeline expansion will continue to supress the retail recovery in the province.


As for Edmonton, the office market is demonstrating tremendous strength, with the overall office vacancy rate down 270 bps year-over-year to end October 2018 at 8.3%, however, net asking rents have decreased by -3.1% over the same period to $18.18/sq. ft./annum. For comparison purposes, downtown and suburban vacancy rates are 8.8% and 8.0%, respectively, with October 2018 downtown net asking rents averaging $18.00/sq. ft. per annum (down 1.6% year-over-year) and just below the suburban average of $18.29/sq. ft. per annum average (which is down 4.1% year-over year). Although the office market continues to perform well, new supply has hit the market and tenants are moving from the old to the new, with some obsolete buildings in the downtown market experiencing persistent vacancy, which is driving down weighted net average asking rental rates. This is creating the dynamic where downtown vacancy is above that of suburban, and downtown rents are almost identical to suburban rents. Some downtown landlords are investing heavily in order to bring their older properties up to the standards of the newly delivered towers downtown. A perfect example of this is AIMCo’s plans for HSBC Bank Place, a 317,000 SF office tower on 101st Street. Other landlords are converting or demolishing their older office towers and transforming them to multifamily or hospitality uses. The landlords that are unable or unwilling to go through these types of exercises will suffer higher vacancy and lower rental rates for their languishing office properties.


The Edmonton industrial market vacancy rate increased by 30 bps year-over-year to end October 2018 at 6.3%, with the average net asking rental rate down -2.3% over the same period to $9.31/sq. ft. per annum. The industrial market continues to experience increased tenant demand from traditional users, but also an increase in demand from non-traditional users, such as the cannabis industry and cryptocurrency miners due, to the low cost of energy in Alberta. As a result, construction activity remains strong, with over 1.1 million sq. ft. currently under construction. Retail vacancy in Edmonton is down 80 bps year-over-year to end October 2018 at 3.3%, with the average net asking rental rate up 19.2% over the same period $24.37/sq. ft. per annum. Despite higher interest rates and increasing debt service costs, which could result in a significant drag on retail sales, Edmonton’s diverse economy is outperforming its southern neighbour, with retail sales expected to increase by 1.7% in 2018 and 2.4% in 2019. Fall out from the newest delays in the Trans Mountain pipeline expansion and the impact it has on consumer confidence will likely continue to supress the retail recovery in the province but not to the same extent in Edmonton as it will in Calgary.


These insights are made possible through CoStar, the largest commercial real estate source for property listings for sale or lease in Canada. CoStar enables users to gain insight into the 29,181 properties currently tracked in Alberta, which include 2,043 properties for sale and 7,296 spaces for lease. 


CoStar conducts constant, proactive research with a team of 60+ researchers making over 12,000 database updates each day. 


Learn how CoStar can help accelerate your business. Request a Demo. 


Overall Market Activity

Properties Tracked


CALGARY

 

TOTAL

15,571

 

OFFICE

 

1,533

INDUSTRIAL

 

4,144

RETAIL

 

4,642

 

EDMONTON

 

TOTAL

13,610

 

OFFICE

 

1,135

INDUSTRIAL

 

5,293

RETAIL

 

3,881

 

ALBERTA

 

TOTAL

29,181

 

OFFICE

 

2,668

INDUSTRIAL

 

9,437

RETAIL

 

8,523

 

PROPERTIES FOR SALE

 

CALGARY

TOTAL

 

921

LAST 30 DAYS

 

NEW LISTINGS ADDED

65

 

OFFICE

 

149

PRICE / SQ. FT

$210

INDUSTRIAL

 

327

PRICE / SQ. FT

$150

RETAIL

 

111

PRICE / SQ. FT

$316

 

EDMONTON

TOTAL

 

1,122

LAST 30 DAYS

 

NEW LISTINGS ADDED

86

 

OFFICE

 

290

PRICE / SQ. FT

$244

INDUSTRIAL

 

334

PRICE / SQ. FT

$133

RETAIL

 

224

PRICE / SQ. FT2

$172

 

ALBERTA

TOTAL

 

2,043

LAST 30 DAYS

 

NEW LISTINGS ADDED

151

 

OFFICE

 

439

INDUSTRIAL

 

661

RETAIL

 

335

 

SPACES FOR LEASE

 

CALGARY

TOTAL

 

3,926

LAST 30 DAYS

 

NEW LISTINGS ADDED

259

 

OFFICE

 

2,474

AVG. NET RENT / SQ. FT

$14.92

INDUSTRIAL

 

701

AVG. NET RENT / SQ. FT

$9.30

RETAIL

 

858

AVG. NET RENT / SQ. FT

$25.76

 

EDMONTON

TOTAL

 

3,370

LAST 30 DAYS

 

NEW LISTINGS ADDED

230

 

OFFICE

 

1,400

AVG. NET RENT / SQ. FT

$18.18

INDUSTRIAL

 

831

AVG. NET RENT / SQ. FT

$9.31

RETAIL

 

1,302

AVG. NET RENT / SQ. FT

$24.37

 

ALBERTA

TOTAL

 

7,296

LAST 30 DAYS

 

NEW LISTINGS ADDED

489

 

OFFICE

 

3,874

INDUSTRIAL

 

1,532

RETAIL

 

2,160