COMMERCIAL MARKET SUMMARY FROM SEPTEMBER 2018

MARKET SUMMARYThe latest Canadian GDP growth data exhibited a resilient annualized growth rate of 2.9% in Q2 2018, a sharp increase from the 1.4% figure in Q1 2018. However, the uncertainty created by the trade wars and the renegotiation of the NAFTA, as well as the newest delays in the Trans Mountain pipeline expansion, will weigh on the Canadian economic outlook for the second half of 2018. Despite this, GDP growth for Canada in 2018 is expected to come in between 2.0% and 2.2%. Although Alberta’s recovery continues, and GDP growth prospects for the province have been curtailed, the province is still expected to outperform Canada as a whole, with GDP growth of 2.4%. The slowdown in Alberta is partially due to a slowdown in capital investment in the energy sector and a continued weak housing market, which is not being helped by more stringent mortgage rules and higher interest rates. By comparison, Calgary and Edmonton are expecting GDP growth of 3.0% and 3.4% in 2018, respectively.Alberta’s employment market is expected to be one of the strongest in Canada in 2018, growing by 1.9%. Although Calgary is expected to see the lion’s share of this, with employment expected to grow by 2.1% versus only 0.5% in Edmonton, the experience in 2018 year-to-date (to July) has been less spectacular and mixed. Calgary has actually experiencing a decline in employment of -0.8% and Edmonton experiencing an increase of 0.9%. Employment related to the Agriculture, Forestry, Fishing and Mining sector is also expected to outperform across the province, growing by 8.0% in Calgary and 6.1% in Edmonton, whereas employment in the Finance, Insurance and Real Estate (FIRE) and Professional, Scientific and Technical Services (PSTS) sectors are expected to decline by -2.1% and -3.1% in Calgary and increase in Edmonton by 4.3% and 5.4%, respectively. Oil prices and the Trans Mountain pipeline expansion will continue to be a key factor to economic growth in both Canada and Alberta specifically, as it will support job creation and consumer spending. Alberta households continue to bounce back, but it will take some time until consumer confidence picks up and translates to higher retail sales. Higher interest rates and increased cost of debt servicing will no doubt impact consumer consumption, and the most recent retail sales data for June 2018 is indicating a pullback, with expectations that retail sales will shrink in 2018, down 0.7% for both Calgary and Edmonton.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 edged up 60 basis points (bps) year-over-year to end August 2018 at 15.6%, and although the average net asking rental rate increased slightly, up 2.0% since the end of Q2 2018, to end August 2018 at $15.52/sq. ft./annum, on a year-over year basis it is down 12.5%. The bigger story remains the delta between downtown and the suburbs. Downtown vacancy is up 30 bps year-over year to 20.3%, creating many options for suburban tenants that are looking for space and willing to relocate downtown. Furthermore, net asking rents downtown have decreased by 23.5% year-over-year to $13.68/sq. ft./annum, which is now well below suburban rents, at $17.64/sq. ft./annum, which have increased slightly, by 0.2% year-over-year. As a result, suburban vacancy actually increased faster than the downtown vacancy rate, up 70 bps year-over-year to 10.6% at the end of August 2018. Although total downtown vacant space continues to rise, downtown sublet space accounted for ‘only’ 26.3% of total vacant space at the end of August 2018, compared to 32.4% at this time last year. Expect office vacancy to continue increasing this year 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 availability downtown hovering closer to 23%, this 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 August 2018 was 5.2%, down 150 bps year-over-year, however, rents were also down by 1.5% over the same period to $9.25/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 3.1 million sq. ft. of industrial space under construction in Calgary, including Amazon’s new 600,000 sq. ft. Western Canada distribution centre in Balzac, which is slated to open later this year and bring an additional 1,000 permanent jobs to the Calgary market. On the retail front, despite Sears shutting down earlier this year, the retail market remains tight, with a vacancy rate of 2.6% at the end of August 2018, down 20 bps year-over-year, however, the average net asking rental rate for retail space was down -3.5% year-over-year to $25.37/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 overall office vacancy rate was down 230 bps year-over-year to end August 2018 at 9.2%, however, net asking rents have decreased by 4.6% over the same period to end August at $17.70/sq. ft./annum. For comparison purposes, downtown and suburban vacancy rates are 10.1% and 8.4%, respectively, with August 2018 downtown net asking rents averaging $17.28/sq. ft./annum (down 9.8% year-over-year), just below the suburban average of $17.98/sq. ft./annum average (down only 1.3% 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, and as a result are driving down average net asking rental rates. This is creating a dynamic where downtown vacancy is above that of suburban, and downtown rents are below suburban rents. As a result, some landlords 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. Preliminary work got underway in June 2018, with AIMCo planning to completely overhaul both the exterior and interior of the building with a triple-glazed curtain wall system, floor-to-ceiling view glass and new mechanical and electrical systems. They are targeting both LEED Gold Certification and WELL Gold Certification.The industrial market vacancy rate decreased by -70 bps year-over-year, ending August 2018 at 5.9%, however, the average net asking rental rate was down -1.1% over the same period to $9.22/sq. ft./annum. The industrial market continues to experience increased tenant demand from traditional users, like the oil sector, but also an increase in demand from both the cannabis industry and cryptocurrency miners due to the low cost of energy in Alberta, and as a result, construction activity has picked up, with 1.4 million sq. ft. currently under construction, up from 1.0 million sq. ft. at this time last year. Retail vacancy is down 70 bps year-over-year to end August 2018 at 3.5%, with the average net asking rental rate up 19.7% over the same period $24.48/sq. ft./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 performing well and retail sales are 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.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 28,545 properties currently tracked in Alberta, which include 2,096 properties for sale and 7,624 spaces for lease.