The Altus Report Fall 2018 Header Image

as published in Informa’s Canadian Real Estate Forum Magazine – Fall 2018

 

By Kruti Desai, Manager, National Research and Raymond Wong, Vice President, Data Operations

 

 

In this issue of The Altus Report, we discuss real estate investment trends in the Calgary and Ottawa market areas.

Ottawa’s robust economy encourages industrial investment activity, while Calgary office vacancy rates continue to face double digits.

Ottawa and Calgary’s industrial markets have picked up with the continued expansion of e-commerce and as larger corporations enter the market. Industrial vacancy rates in Calgary and Ottawa have declined with availability showing signs of compression. There is a shortage of industrial space, more specifically properties with high ceiling spaces. Online retailers need nearly triple the square footage for logistics and distribution compared to traditional industrial warehouse users. Enter Amazon, who hired Broccolini as the developer of Ottawa’s largest industrial building, at 1.1M SF in the far east-end of the city. Broccolini purchased the land for Amazon’s future home closing at just over $10.5M in Q2 2018. Another large-scale construction taking front seat in Ottawa’s industrial market is the UPS truck transport facility in Kanata at slightly over 40,500 SF, and these are just two examples of the uptick in construction activity in Ottawa.

 

Industrial Vacancy Rates

Industrial Vacancy Rates Chart

 

Calgary’s industrial market continues to perform well with the development of new distribution centres on the horizon. Amazon is also expected to open a newly-built 600,000 SF fulfilment centre just north of Calgary at the Nose Creek Business Park in Balzac, Alberta that will process orders for Western Canada. The large-scale project is being developed by QuadReal Property Group. As e-commerce continues to grow, the construction of new distribution centres will likely produce significant economic growth. The Balzac and Ottawa Amazon facilities each are expected to create almost 1,000 ongoing jobs, in addition to the one-time construction jobs created, further driving the regions’ economies.

Nose Creek Business Park already houses Walmart’s distribution centre and will be the future home to Enterra Feed Corp, who leased 184,800 SF. Whirlpool Canada is also building a 422,000 SF industrial space in Logistics Park in Conrich and developer Hopewell is expected to begin construction on a new 524,490 SF multi-tenant space in Balzac’s Crosspointe Industrial Park. A few key noteworthy transactions in the Calgary industrial market were also registered during the first half of 2018. Anthem Properties expanded their portfolio in Calgary by acquiring three income-producing industrial properties $21.35M and is under contract to purchase a fourth. The properties were purchased from Canfirst Capital Management and are 100% leased to a diverse tenant roster, representing 176,000 SF of GLA in Greenview Industrial Park and Foothills.

Additionally, Fiera Properties purchased a 462K square foot industrial portfolio in Calgary and Edmonton from Morguard for $61.4M. The Slate portfolio also continues to grow with the $1.14B transaction of Cominar’s non-core market property portfolio, part of which includes significant industrial space in Western Canada.

 

Redevelopment for older office buildings gets underway as pressures rise for value-driven and higher quality space

Ottawa’s office sector is showing signs of improvement bringing vacancy rates down in Q2 to 10.6% and lower than the national average of 11.9%. A new wave of tenants and building owners are beginning to redevelop older, outdated office supply. 151 Slater St is a prime example of an older building being renovated to accommodate NavCanada as its main tenant. Tenants are looking for good quality space, and most tenants prefer newer amenities, upgraded systems, and co-working spaces, just to name a few.

Another Class B CBD building undergoing a major renovation is 66 Slater St, which had its lobby renovated with new finishes, upgrades to the washrooms, elevators, and mechanical systems. The building’s largest tenant, the Department of National Defense, will vacate the building as part of the department’s move to the Carling Campus in Ottawa’s west end. Following on the direction of Shopify to move to the downtown core in 150 Elgin and 234 Laurier, 200 Laurier Ave, secured SurveyMonkey as the lead tenant in their recently renovated building following the departure of the federal government.

Klipfolio and Telesat are among other tech firms that have also absorbed significant office space in the downtown core following several years of federal government actions which pushed up vacancy rates. However, as the feds resume growth and increase their employment base, anticipate competition with the tech sector for space in the core.

Office Vacancy Rates

Office Vacancy Rates Chart

 

Calgary’s office market tries to stay afloat amid high vacancy rates as Calgary’s suburban markets outperform the downtown core pushing landlords to repurpose older office space to level the playing field. Improvements to Class A spaces and increased leasing activity, particularly subleases in the downtown office market, have kept absorption rates in the black in the first half of 2018. Available inventory for downtown Class A product remains tight.

This sparks a similar trend to Ottawa compelling landlords to consider renovating older buildings in the core to meet tenant demands. The growth of the coworking sector, flexible workspaces and niche amenities continue to shape the office market. Downtown tenants may also find an opportunity to capitalize on these market conditions by migrating from Class B or C offices into higher quality office spaces outside the downtown core. Although vacancy rates in Calgary’s suburban markets remain high, particularly in the southern and Beltline regions at 21.4% and 22.3% respectively, the flight to quality space is keeping vacancy rates below downtown levels. The northern region has already witnessed this migration away from downtown lowering vacancy rates to 13.7% in Q2 compared to the downtown vacancy rate at 24.8%.

 

Interest in new development projects picks up as feds and tech sector vie for prime office space

Competition for larger commercial space in Ottawa is expected to heat up. The federal government recently expressed interest in downtown office space suggesting future growth in the central business district. Meanwhile, the tech industry’s appetite for prime office space remains strong as it continues to be Canada’s fastest growing sector. The federal government accounts for almost 50% of occupied space in the Ottawa region of which almost 40% is leased from the private sector. The Department of National Defense recently announced the possibility of building another 800,000 SF Operations HQ in the vicinity of its Carling Campus.

The City of Ottawa has recently approved the mixed-use development of Trinity Centre at 900 Albert St, which will include three towers, one of which, at 65 storeys will be the tallest in the city. Almost right next door, the city approved a 5-tower mixed-use development in the eastern portion of Lebreton Flats which will include almost 230,000 SF of commercial space. The first phase of the multi-phase Zibi development is progressing with the first residential occupants expected to be begin taking up residence in late 2018. This 37-acre project in Ottawa and Gatineau will consist of condominiums, townhomes, commercial and retail space, recreational facilities and waterfront plazas. The development will transform the lands into a sustainable, eco-friendly, mixed-use community and provide a unique opportunity for people to “live-work-play”.

Construction of new office buildings in Calgary continues to move slower for both downtown and suburban markets with the completion of only two new builds, the Hexagon Calgary Campus at 160,000 SF and the 28,000 SF Mount Royal West, both fully leased upon completion. Royal Vista Plaza, a mixed office and retail property in the north-west region, is expected to be completed this Fall.

 

Office Space Completions and Absorption

12 months ending June in each year

Office Space Completions and Absorption Chart

 

Landlords strategize to offer value-added space by repositioning acquisitions in select markets

Calgary’s economy continues to show signs of recovery following the energy downtown. Overall investment sales were slightly up in Calgary with a few high-profile deals in selective areas showing that opportunities still exist for attractive investments. The First Tower Class B office building in downtown Calgary was the largest transaction in Q2, a joint venture by Hines and Oaktree Capital for $107M. The property’s previous owners recently upgraded its main level. Its new owners plan to continue with improvements by adding amenity-rich spaces and bringing it up to a Class A standard. The purchase of the Scotia Centre by Slate Asset Management for $95.1M further boosted overall transactions in Q2. Slate continues to strengthen their position in target markets with the $1.4B acquisition of Cominar’s non-core market portfolio. The portfolio is composed of 95 properties located in the Greater Toronto Area, the Atlantic provinces, and Western Canada, which included office space just under 1M SF in Calgary. Cominar’s strategy is to decrease their debt ratio and focus on its core markets portfolio in the Quebec and Ottawa regions.

In the multifamily sector, Vancouver-based firm Anthem Properties Group Ltd. bought the former CBC building in Hillhurst, Calgary for $12M and plans to repurpose the property as a multi-family residential development. Hollyburn Properties acquired Central Towers, a high-rise residential rental building located in the Beltline’s emerging Connaught district, just outside the downtown core, for $11.8 M. LaSalle Canada continues to raise capital and expand their portfolio purchasing Calgary’s Market at Quarry Park for $52.6M. LaSalle also acquired a $135M (33.3%) interest in Minto Place, a three-building complex bordered by Laurier Ave, Kent, Slater, and Lyon Streets in Ottawa’s CBD. The complex is one of Ottawa’s largest Class A office properties with both leasable office and retail space, and following the transaction is now owned equally by Minto, Investors group and LaSalle. Fiera Properties remains active in their acquisitions with the purchase of four almost entirely leased office buildings for $74.1M in Ottawa’s western community of Kanata.

 

Investment Property Sales Transactions

Selected Major Markets, First Half of Year

Investment Property Sales Transactions Charts

Featured Calgary and Ottawa Market Sales Transactions 2018

Featured Calgary and Ottawa Market Sales Transactions 2018 Chart

 

Location Barometer for Real Estate Investment

Location Barometer for Real Estate Investment Chart

 

Alberta and Ontario gear up for Canada’s next big industry – the legalization of cannabis

The upcoming October legalization of recreational cannabis has already started to stimulate the economy. Demand for retail and industrial space among cannabis suppliers (growers, warehouses, and distributors) has firms actively scouting for prime locations, ramping up production capacity, and securing leases ahead of schedule. Landlords in some areas in Alberta are boosting premium rents to almost double the rent for cannabis stores. Indoor cultivation incurs higher costs for electrical, plumbing, drainage, HVAC, and security upgrades and will play a larger role in rate increases.

Ontario and Alberta’s retail model both consist of private retailers, however Ontario will take on a more government-provisioned approach and control distribution and online sales, though Calgary has restricted the proximity between cannabis stores to 300 metres. According to Statistics Canada, nearly 5 million Canadians spent about $5.7 billion on non-medical marijuana sales last year. Canadian Imperial Bank of Commerce (CIBC) estimates retail sales revenue for adult-use cannabis will grow rapidly and approach $6.5 billion by 2020. Health Canada has already issued 113 licenses for cultivation operations across the country but face a backlog of 500+ applicants and counting.

Depending on government policy, tax implications, pricing, and product accessibility and availability, legalization has the potential to foster economic growth by creating new opportunities for commercial real estate, boost employment, and eventually disrupt the black market by shifting revenue streams. However, based on “true” demand, many suspect an impending shortage upon legalization due to inadequate production capacity. Although several new developments are currently underway, the facilities will not be fully operational until the end of 2018 or 2019. In the interim, the black market will likely carry the load.

The potential shortfall may be one of the greater challenges of this burgeoning industry. In Q2, Sundial Growers partnered with the University of Calgary for cannabis-related research and Sundial is expected to grow from 100 to over 500 employees by 2020. CannabisCo has proposed to convert 100,000 SF of the former 373,000 SF Nestlé plant in Chesterville, just south of Ottawa, into a cannabis production plant. The operation is expected to create 200 jobs and plans to build an additional 300,000 SF. Another significant proposal in Ottawa is by Artiva to convert 549,000 SF of greenhouse space into cannabis cultivation and production, creating almost 80 jobs with the potential to add another 646,000 SF.

 

Top 5 and Bottom 5 Favoured Real Estate Segments

Q2 2018

Top 5 and Bottom 5 Favoured Real Estate Segments Chart

 

Moderate economic growth facilitates slow recovery of housing market

While the initial shock of Canada’s mortgage stress test has dampened, higher mortgage rates are expected to slow down existing and new home sales. Construction labour shortages and cost pressures on high-rise construction amid the risk of trade protectionism may further curb demand leading to a more stabilized rate of housing starts. Canada imports steel from over 100 companies, more specifically steel rebar, which is used to reinforce concrete in condominiums. Trade tariffs may soon drive up rebar prices and increase production costs significantly impacting the price of condos, further exacerbating the affordability crisis.

Population growth, increase in immigration, and low unemployment levels have kept housing demand steady and rental vacancy rates low in 2018. In the next two years, the national employment level is expected to remain positive in key markets with the expansion of the tech sector, legalization of marijuana, and the revival of public administration hiring boosting income levels and homebuyer intentions.

Energy-producing provinces continue to recover from the oil-driven recession which will lead to moderate economic growth. As new projects go up in Ottawa and Calgary, homebuyers priced out of Vancouver and Toronto markets may consider these regions as an alternative option. New condo sales in Calgary were slightly up since last year and first-time homebuyers regain confidence suggests a potential rebound in Calgary’s housing market. First-time homebuyer intentions in Ottawa were down compared to last year. However, as new infrastructure, development and commercial renovation projects reshape the Ottawa region strengthening employment levels, increased demand for housing may not be too far behind.

 

Employment Growth

Selected Major Markets, Year-over-Year % Change

Employment Growth Chart

 

 

New Condominium Apartment Sales

Selected Major Markets, First Half of Year

New Condominium Apartment Sales Chart

 

First Time Home-Buying Intentions

Selected Major Markets, % of Renters Planning to Buy a Home in the Next Year

First-Time Home-buying Intentions Chart

 

 

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