What commercial market in Canada has the whole country talking? This week Cory welcomes Lori Suba and Laurae Spindler, of Scout Real Estate in Calgary, to unpack the rollercoaster of action our friends over in the prairies are experiencing in the commercial market.
Ever since the oil and gas sector crashed, Calgary has seen a down market which has lasted for a few years now. But, as Lori and Laurae discuss, you might be surprised to hear how some asset classes have bounced back and there is now overwhelming demand for one asset class in particular, which has seen percentage growth in numbers similar to that of BC!
If you like to keep your finger on the pulse of commercial real estate in Canada, or just enjoy hearing great turn around stories, this episode is for you.
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What is Scout Real Estate?
Lori: We launched Scout Real Estate in 2020. I have 20 years of commercial real estate experience and Laurae has 15 years. So we joined forces and now focus mostly on industrial and office real estate. We work for both tenants and landlord-owners.
What is the story of the Calgary commercial real estate market? You always have to have your seatbelt on in Calgary because it’s a roller coaster ride! Our market is driven by commodity prices, because we are oil and gas HQ in Canada. We’ve had a down market for over five years. In 2007, our vacancy rate was 0.7%. Now, we’re north of 30% vacant, and have been for many years. So it’s been a challenging market. Many big, national oil groups have pulled out of Canada.
Will oil groups leaving, are any other industries filling in office space in Calgary? We are seeing tech businesses come into the market, which is positive news for Calgary. We’re seeing more diversification, but it’s going to take a long time to chew through the vacancies. Oil companies used to take up a lot of square feet speculatively. The tech groups just don’t require the same size as the oil patch. But it’s still positive news. We saw some positive absorption in Calgary office space lately. While we’ve seen some positive quarters, there’s also some negative absorption as companies consolidate. The future of remote work is also changing how much office space companies need. So even with some positive quarters, it’s been a long haul.
How has Calgary’s downtown office market changed? The office market in downtown Calgary is about 44 million square feet. So we have a massive downtown core, which is different from other markets with suburban nodes. Everyone works downtown and we don’t have sizeable suburban office nodes with large-scale projects. Downtown is central, public transit bisects through the core and that’s where everyone went pre-pandemic. But now, people are looking at space differently and wondering where they want to be.
Does the high office vacancy rate in Calgary create an opportunity for developers and landowners to convert office space into residential projects? Yes, that’s what is actually happening right now. The City of Calgary set up a grant program for these conversion projects – turning under-utilized or vacant office towers into multi-family housing, and potentially post-secondary schools or hotel space. To date, they have doled out 660,000 square feet worth of conversion space. But the city thinks we need to see 6 million square feet converted to move the needle.
How’s the retail market in Calgary? Overall, retail in Calgary has performed well. But we have had challenges downtown. There aren’t people there working, so that doesn’t support retail. And then if the retail isn’t there, that doesn’t attract people to come downtown. So it’s a bit of a chicken and egg story. But overall, retail is still performing quite well. There were a few closures but we’re seeing a lot of interest and a big uptick in new businesses. Overall, it’s a positive story.
An acre of industrial land in Burnaby goes for $7-9 million. What is the cost of industrial land in Calgary? Industrial real estate is on fire in Calgary, but much cheaper than Vancouver! For a central industrial space close to downtown, we’re talking about $1 million per acre. North of the ring road and to the southeast on the 84th street corridor, you’re looking at $600,000-650,000 per acre for a larger pocket of land. Prices are starting to go up and we’ve seen record investment over the last couple of quarters. Bigger players are moving in and there’s more and more development. So prices for industrial land in Calgary are being driven up but nowhere near Vancouver rates. Over the last 6 years, we’ve seen about 8-9 million square feet of development in Balzac, just north of Calgary. It’s only a couple minutes off the ring road and has lower property taxes because it’s in a different municipality, making it attractive for buyers.
What are the lease rates in Balzac, Alberta? We tend to see more medium to large bay warehouse logistic users in the Balzac area. For 50,000 square feet, that was probably going for $6.75/square foot a few years ago. Now, we’re in the $800s. There’s been quite a growth in the rental rates, but nothing compared to the double digits in Vancouver.
What are the vacancy rates in Calgary? In the Greater Calgary area, we’re seeing 2-4% vacancy and availability. Balzac would have higher vacancy, but only because they have larger spaces being built out. They’re also seeing the highest demand. The last 7-8 months in particular have seen a lot of demand in industrial space. Our geographic position makes Calgary a really strategic spot for investors.
Where can I find the best industrial real estate investment in Calgary? For the best product, you have to get in line. There are limited opportunities because industrial has outperformed every other asset class through covid. If you were looking for something less than AAA, there may be some more opportunities. But industrial AAA is the hot ticket in Calgary.
Have supply chain issues impacted the development sector? Where are prices going? We’re seeing the same supply chain issues and rising costs facing the rest of the country here in Calgary. We’re hearing 25-30% price increases across the board since January 2022. The rising supply costs and construction costs are partially why industrial rental rates are increasing. There’s a lot of uncertainty for developers. For the more nimble developers, their strategy is to preorder materials they know they will need and stockpile them if they can. That gives them a competitive advantage. We’re not yet seeing projects being put on hold or cancelled in Calgary. We have about 10 million square feet of industrial space coming on stream in the next 12 months. Prices are rising, which might be a function of the land cost, but developers are still able to make up the difference. They can increase rents and the market will absorb it.
How do rising interest rates impact the Calgary commercial real estate market? The effect of rising interest rates on Calgary’s real estate market depends a lot on the asset class and the size of the institution behind it. For larger institutions and developers, they know an interest rate hike is coming and they’re planning for it. They’re positioned to handle it because they’ve been preparing for rates to go up. If the interest rate hikes get drastic, it will affect things. There’s a certain amount the market can bear before we feel a big effect.
On the different real estate product in Calgary: It’s a tale of two cities in Calgary. The AA Class buildings are close to 9% vacancy whiel B Class product can be up to 50% vacancy. There’s a real divide between the different types of product. People want to be in the better quality buildings and landlords see that, so rates are creeping up. For some of the B Class product, tenants are paying operating costs only. That’s the case in the west end for sure. For a typical A Class product, rates would be in the mid-teens. Back in 2007, a deal was done with some lower quality product where the tenants had to sign a 10 year lease at $40 net. Nowadays with similar buildings, they can’t give it away. So it’s a roller coaster!
Where is the Calgary commercial real estate market going? There’s nowhere to go but up! If you’re a broker, you have to be optimistic. We have our challenges in Calgary, particularly on the office side. But Calgarians are very innovative and entrepreneurial. I think we’ll see some cool things come out of this that will make our city stronger. I think we’ll also see a transition to clean energy. Calgary is naturally positioned to be a leader in clean energy and I think there’s a great opportunity for us to lead the way in clean energy and in tech. There are opportunities, but it will take time for us to recover. WIth industrial real estate, we have a lot of product coming to market. Time will tell how that shakes out. But we’re well-positioned for the industrial market to continue to grow and perform strongly.