Calgary Industrial Market Report
Calgary Industrial Market Report March 2011
Market Overview Positive momentum continues to grow within the Calgary industrial market. Signals, such as larger longer-term deals, a reduction in unoccupied, recently-completed space, and an overall increase in demand have been witnessed. While overall demand remains lower than peak levels of the last cycle, activity levels rose steadily during 2010 and in Q1, 2011. Rental rates are stabilizing and have increased modestly in certain product types around the city. This trend of decreasing vacancy has convinced several developers to bring new product to the market. This new construction will not be available until the end of 2011. Had it not been for two specialized large warehouse/manufacturing facilities becoming vacant in the fourth quarter, the overall availability would have continued its lower trend. A sizeable number of larger leases (50,000 square feet (sf ) plus) were completed in late 2010 and early 2011. Vacancy appears to have stabilized, with no foreseeable reasons for an increase in the short-term. Activity levels are expected to remain healthy over the coming year. In many cases a compelling argument to get deals done now is being presented. In spite of this opportunities still remain for tenants to benefit from current rents and inducements, with the ability to secure leases at lower rates than recorded at the peak of the boom in mid-2008. Many landlords appear keen to complete deals in the near term and are aggressively competing in terms of rates and inducements. There are also more options today in terms of serviced, zoned industrial land than there have been for many years. It is expected that the number of lease transactions will increase as the perception that the bottom of the economic decline has been passed.
Vacancy Calgary’s industrial market availability is 5.2% (including sublease space) as of the end of 2010. This is up marginally from 5.0% in the previous two quarters, due to two large, singletenant industrial buildings becoming vacant: Haworth Ltd.’s
* This index is a composite of the vacancies of the largest multi-tenant landlords in Calgary. These 21 Landlords represent the majority of the active leasing market.
facility at 10 Smed Lane SE and Enerflex Systems Ltd.’s facility at 4700 – 47th Street SE. These two buildings equal approximately 1% of the city’s total industrial inventory of 106 million square feet (msf ) and are considered specialized buildings, suitable only to a specific target audience. While vacancy rates over 5% feel high, compared with vacancy rates below 2%, which were experienced in 2006-2007, it actually falls into the range that is traditionally viewed as a stable market, which is considered to be between 5% and 8%.
NOTABLE 2010 INDUSTRIAL LEASE DEALS
Avison Young’s Calgary Industrial Landlord Vacancy Index* (a survey of the portfolios of the 21 largest landlords in Calgary, which represents approximately 33% of the city’s industrial inventory and the majority of the leasing activity taking place.) for fourth quarter 2010 is 6.8%. This is down from 8.0% in third quarter 2010, and down from 11.2% one year previous. The vacancy index hovered between 9% and 11%, averaging 9.9%, for the 18 months following the start of the downturn. This most recent decrease is a strong indication of a continued trend towards increased economic activity, and a positive indication of future growth. When examining the different sub-markets within the greater Calgary area, the index in northeast Calgary is 8.6%, southeast Calgary is 7.4% and the central portion of the city is 3.8%. This shows some distinct changes from fourth quarter 2009, when the index in the northeast was 11.6%, southeast Calgary was 13.6%, and the central portion of the city was 5.5%. The vacancy indices by type of product have been steadily decreasing over the past year, with the exception of flex space in fourth quarter 2010. There are two main types of industrial space: flex and warehouse. Flex space is typically defined as smaller (less than 10,000 sf ) bays with a higher proportion (greater than 25%) of showroom and/or office space, whereas warehouse space is typically in larger format buildings with relatively little office and/or showroom space. Warehouse style product currently has a vacancy index of 6.8%, whereas flex style product has an index of 5.5%. These numbers have changed on both the warehouse and the flex sides from both third quarter 2010, which recorded a warehouse index of 8.4% and a flex index of 4.3%, and from one year ago, when warehouse product had a 12.5% vacancy index and flex space had a 5.0% vacancy index.
Avison Young Calgary Industrial Market Report - March 2011
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Net Rental Rates Average asking rental rates for industrial properties in Calgary started to rise in the fourth quarter of 2010 from their previous lows. The average asking rate was $9.74 per square foot per annum (psf ) net for space less than 10,000 sf in area, for space between 10,000 and 50,000 sf the average asking rate was $7.66 psf net, and when looking at space greater than 50,000 sf the average asking rate was $6.82 psf net. Older, functionally-obsolete warehouse buildings are being quoted below $5.00 psf net. The overall average asking rate was $7.54 psf net. The spread between asking and actual deals still exists, but the gap has decreased. Operating costs and taxes have also dropped from peak levels; however an increase in annual operating costs from the low levels in 2009 has been noticed. Tenants occupying space less than 10,000 sf can expect to pay an average of $3.84 psf per annum in addition to the negotiated net rent, for space between 10,000 and 50,000 sf the average is $3.14 psf and when looking at space greater than 50,000 sf the average is $2.43 psf. The overall average rate for taxes and operating costs across all surveyed properties in Calgary is $3.02 psf.
Land Availability and Pricing The market downturn and an increase in available inventory have caused the average price per acre for Calgary serviced industrial land to decline. This has not been the case across all the sub-areas of the city however. A large factor for this may be the general lack of sales, which has resulted in very few market comparables to analyze before offers are being made, forcing purchasers to rely on older, more expensive sales to evaluate properties. There are four distinct zones within the city for this type of land, and the pricing for each tends to be independent of the other areas. Out of 28 sales in the 2010, six were for the city’s newest industrial park Royal Vista. This quadrant of the city, prior to 2009, had not had available, zoned industrial land in over five years, resulting in these newly released lots commanding relatively high prices. The average for this area is currently $661,000 per acre.
NOTABLE 2010 SERVICED INDUSTRIAL LAND SALES
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In the older, more established central industrial area, there are few opportunities for bare land acquisitions. There was one sale recorded in this area in 2010, with a price per acre of $851,000, consistent with sales in this area in previous years. The southeast area of the city, on the other hand, has an abundance of zoned, serviced industrial land opportunities, and this has resulted in prices being significantly lower than other quadrants of the city. The 15 sales recorded averaged $561,000 per acre in 2010. Meanwhile, in the northeast portion of the city, there were six recorded sales with an average sale price equaling $801,000 per acre. Meanwhile, unserviced industrial land (or long-term investment land) sales have dried-up. There were five recorded sales of unserviced industrial land inside the Calgary city limits in 2010, with an average price per acre of $187,000. The uncertainty surrounding long-term growth of speculative land investment and development has caused investors to shy away from this type of product. Partially serviced lands, primarily those sites located along the eastern edge of the city, recorded three sales in 2010. On average they sold for $270,000 per acre. Almost identical to the $269,000 per acre average in 2009, and down from the average in 2008 of $307,000 per acre. Attention is being shifted away from the markets surrounding Calgary. Locations such as Airdrie and Balzac are areas with a significant amount of additional suitably zoned land (over 1,500 acres). While these areas offer some location and pricing advantages over those properties located inside the City of Calgary’s industrial market, they are now competing with a larger number of properties, located closer to suppliers, clients and employees. Expect to see prices decrease further over the coming year as competition for purchasers intensifies and the economy pushes price expectations back down. 2010 saw average sale price of $470,000 per acre for serviced land in Airdrie and $351,000 per acre in Balzac.
NOTABLE 2010 INDUSTRIAL SALES
New Industrial Development Speculative construction is once again being discussed. Hopewell, WAM, Oxford and Remington all have projects ready to commence construction this spring. Demand has started to increase and the supply of available space has decreased, especially for large-bay
Avison Young Calgary Industrial Market Report - March 2011
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product, and there is an abundance of available land ready to go. By the end of the first quarter of 2009, the flow of newly constructed industrial space into the Calgary market had stopped. With the exception of some owner/user projects, almost no construction has taken place in the last two years. This is good news for a market which is almost finished absorbing all the new space injected into the inventory. Assuming that a new development makes financial sense to all the parties involved, while the market may not immediately need space, as vacancy continues to decline, given the time required to complete a building for occupancy, the time to start building again will be here soon.
Industrial Building Sales and Investment The Calgary industrial market, as with most other property types, experienced an increase in dollar volume and number of transactions in 2010, over 2009. Total industrial sales for the year were $305 million in 47 sales. This is up 34% from the $228 million in dollar volume experienced in 2009 in 35 sales. The largest industrial deal in 2010 was part of the $2 billion portfolio transaction between Kingsett Capital Inc. and Alberta Investment Management Corp., and ING Summit Industrial Fund GP Inc. 7140 – 40th Street SE was sold in November 2010 for a purchase price of $30,084,923, which results in a price per square foot of $85. This 353,565 sf warehouse and office building is fully leased on a long-term basis to Gienow Windows and Doors Ltd., a manufacturing company owned by VKR Holding of Denmark, which owns and operates a global network of window and door manufacturing companies. There are early reports that strong sales will be recorded in 2011 as well, evidenced by the soon to be completed sales of Trammell Crow’s three AirFreight & Logistics Centre properties, containing 306,857 sf, to GWL Realty Advisors and GWL Realty Advisors’ sale of the 118,402 sf Deerfoot Distribution Centre (Xerox) to Crestpoint Investment Group. The 2010 average price per square foot was $118 (excluding condominium units), down 3% from the $121 psf average recorded in 2009. The average price per sale is $6.5 million, remaining the same as 2009. Owner-users have remained within this segment in the market, and currently comprise 32% of all industrial building purchases taking place, by number of sales, however investors are once again active in the Calgary industrial market. While 61% of the dollar volume transacting in 2009 was purchased by investors, 68% of the dollar volume in 2010 was purchased by investors. There have been indications in the market that many investors believe the bottom of the current economic cycle either has
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been reached or will be reached soon, and now is the time to capitalize on the opportunities in the market.
Industrial Condominiums Prices are currently averaging between $160 and $205 psf for typical new construction bays (less than 4,000 sf ) inside the City of Calgary and $150 to $180 psf for secondary sales. Meanwhile, in areas surrounding the city the average price is between $135 and $180 psf. An abundance of newly completed industrial condominium buildings in the south and in Airdrie have driven prices down, whereas demand seems to be thriving in the north and east areas of the city causing prices to increase. There were 177 sales of industrial condominium units in the Greater Calgary Area in 2010, with a combined total price of $82.0 million. This is up 4% in dollar volume from 2009, which recorded $78.7 million in 151 sales. It is also down 23% in dollar volume from 2008, which recorded $106.4 million in 189 sales. Condominium ownership remains attractive for investors and those users who can safely predict their operational requirements for the next few years. Buying is going to make more sense for businesses which are more established, who want to be in one location long-term and who have the financial resources to take on a real estate investment.
Featured Avison Young Calgary Listings
www.avisonyoung.com
Wagon Wheel Business Park Up to 450,000 sf Balzac Industrial Build-to-Suit Opportunity
4447 - 46th Avenue SE up to 100,292 sf Southeast Industrial Leasing Opportunity
6110 - 44th Street SE up to 85,000 sf Southeast Industrial Build-to-Suit Opportunity
1891 - 15th Street SE up to 60,000 sf Central Industrial Leasing Opportunity
4907 & 4915 - 77th Ave SE 55,302 sf Southeast Industrial Building For Sale
4905 - 77th Avenue SE 31,790 sf Southeast Industrial Leasing Opportunity
6810 - 6th Street SE 26,220 sf Central Industrial Leasing Opportunity
31264 Highway 2A 26,184 sf Didsbury Industrial Leasing Opportunity
Calgary Industrial Leasing & Investment Team Norman Lippitt 403.232.4303 [email protected]
Doug Johannson 403.232.4314 [email protected]
Teresa Matys 403.232.4309 [email protected]
Jeff Buziak 403.232.4335 [email protected]
Kent Bacon 403.232.4330 [email protected]
George Marshall 403.232.4338 [email protected]
Steve Vesuwalla 403.232.4306 [email protected]
Manuel Verdugo 403.232.4328 [email protected]
© 2011, Avison Young Real Estate Alberta Inc. The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.
Avison Young Calgary Industrial Market Report - March 2011
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Market Overview Positive momentum continues to grow within the Calgary industrial market. Signals, such as larger longer-term deals, a reduction in unoccupied, recently-completed space, and an overall increase in demand have been witnessed. While overall demand remains lower than peak levels of the last cycle, activity levels rose steadily during 2010 and in Q1, 2011. Rental rates are stabilizing and have increased modestly in certain product types around the city. This trend of decreasing vacancy has convinced several developers to bring new product to the market. This new construction will not be available until the end of 2011. Had it not been for two specialized large warehouse/manufacturing facilities becoming vacant in the fourth quarter, the overall availability would have continued its lower trend. A sizeable number of larger leases (50,000 square feet (sf ) plus) were completed in late 2010 and early 2011. Vacancy appears to have stabilized, with no foreseeable reasons for an increase in the short-term. Activity levels are expected to remain healthy over the coming year. In many cases a compelling argument to get deals done now is being presented. In spite of this opportunities still remain for tenants to benefit from current rents and inducements, with the ability to secure leases at lower rates than recorded at the peak of the boom in mid-2008. Many landlords appear keen to complete deals in the near term and are aggressively competing in terms of rates and inducements. There are also more options today in terms of serviced, zoned industrial land than there have been for many years. It is expected that the number of lease transactions will increase as the perception that the bottom of the economic decline has been passed.
Vacancy Calgary’s industrial market availability is 5.2% (including sublease space) as of the end of 2010. This is up marginally from 5.0% in the previous two quarters, due to two large, singletenant industrial buildings becoming vacant: Haworth Ltd.’s
* This index is a composite of the vacancies of the largest multi-tenant landlords in Calgary. These 21 Landlords represent the majority of the active leasing market.
facility at 10 Smed Lane SE and Enerflex Systems Ltd.’s facility at 4700 – 47th Street SE. These two buildings equal approximately 1% of the city’s total industrial inventory of 106 million square feet (msf ) and are considered specialized buildings, suitable only to a specific target audience. While vacancy rates over 5% feel high, compared with vacancy rates below 2%, which were experienced in 2006-2007, it actually falls into the range that is traditionally viewed as a stable market, which is considered to be between 5% and 8%.
NOTABLE 2010 INDUSTRIAL LEASE DEALS
Avison Young’s Calgary Industrial Landlord Vacancy Index* (a survey of the portfolios of the 21 largest landlords in Calgary, which represents approximately 33% of the city’s industrial inventory and the majority of the leasing activity taking place.) for fourth quarter 2010 is 6.8%. This is down from 8.0% in third quarter 2010, and down from 11.2% one year previous. The vacancy index hovered between 9% and 11%, averaging 9.9%, for the 18 months following the start of the downturn. This most recent decrease is a strong indication of a continued trend towards increased economic activity, and a positive indication of future growth. When examining the different sub-markets within the greater Calgary area, the index in northeast Calgary is 8.6%, southeast Calgary is 7.4% and the central portion of the city is 3.8%. This shows some distinct changes from fourth quarter 2009, when the index in the northeast was 11.6%, southeast Calgary was 13.6%, and the central portion of the city was 5.5%. The vacancy indices by type of product have been steadily decreasing over the past year, with the exception of flex space in fourth quarter 2010. There are two main types of industrial space: flex and warehouse. Flex space is typically defined as smaller (less than 10,000 sf ) bays with a higher proportion (greater than 25%) of showroom and/or office space, whereas warehouse space is typically in larger format buildings with relatively little office and/or showroom space. Warehouse style product currently has a vacancy index of 6.8%, whereas flex style product has an index of 5.5%. These numbers have changed on both the warehouse and the flex sides from both third quarter 2010, which recorded a warehouse index of 8.4% and a flex index of 4.3%, and from one year ago, when warehouse product had a 12.5% vacancy index and flex space had a 5.0% vacancy index.
Avison Young Calgary Industrial Market Report - March 2011
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Net Rental Rates Average asking rental rates for industrial properties in Calgary started to rise in the fourth quarter of 2010 from their previous lows. The average asking rate was $9.74 per square foot per annum (psf ) net for space less than 10,000 sf in area, for space between 10,000 and 50,000 sf the average asking rate was $7.66 psf net, and when looking at space greater than 50,000 sf the average asking rate was $6.82 psf net. Older, functionally-obsolete warehouse buildings are being quoted below $5.00 psf net. The overall average asking rate was $7.54 psf net. The spread between asking and actual deals still exists, but the gap has decreased. Operating costs and taxes have also dropped from peak levels; however an increase in annual operating costs from the low levels in 2009 has been noticed. Tenants occupying space less than 10,000 sf can expect to pay an average of $3.84 psf per annum in addition to the negotiated net rent, for space between 10,000 and 50,000 sf the average is $3.14 psf and when looking at space greater than 50,000 sf the average is $2.43 psf. The overall average rate for taxes and operating costs across all surveyed properties in Calgary is $3.02 psf.
Land Availability and Pricing The market downturn and an increase in available inventory have caused the average price per acre for Calgary serviced industrial land to decline. This has not been the case across all the sub-areas of the city however. A large factor for this may be the general lack of sales, which has resulted in very few market comparables to analyze before offers are being made, forcing purchasers to rely on older, more expensive sales to evaluate properties. There are four distinct zones within the city for this type of land, and the pricing for each tends to be independent of the other areas. Out of 28 sales in the 2010, six were for the city’s newest industrial park Royal Vista. This quadrant of the city, prior to 2009, had not had available, zoned industrial land in over five years, resulting in these newly released lots commanding relatively high prices. The average for this area is currently $661,000 per acre.
NOTABLE 2010 SERVICED INDUSTRIAL LAND SALES
Avison Young Calgary Industrial Market Report - March 2011
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In the older, more established central industrial area, there are few opportunities for bare land acquisitions. There was one sale recorded in this area in 2010, with a price per acre of $851,000, consistent with sales in this area in previous years. The southeast area of the city, on the other hand, has an abundance of zoned, serviced industrial land opportunities, and this has resulted in prices being significantly lower than other quadrants of the city. The 15 sales recorded averaged $561,000 per acre in 2010. Meanwhile, in the northeast portion of the city, there were six recorded sales with an average sale price equaling $801,000 per acre. Meanwhile, unserviced industrial land (or long-term investment land) sales have dried-up. There were five recorded sales of unserviced industrial land inside the Calgary city limits in 2010, with an average price per acre of $187,000. The uncertainty surrounding long-term growth of speculative land investment and development has caused investors to shy away from this type of product. Partially serviced lands, primarily those sites located along the eastern edge of the city, recorded three sales in 2010. On average they sold for $270,000 per acre. Almost identical to the $269,000 per acre average in 2009, and down from the average in 2008 of $307,000 per acre. Attention is being shifted away from the markets surrounding Calgary. Locations such as Airdrie and Balzac are areas with a significant amount of additional suitably zoned land (over 1,500 acres). While these areas offer some location and pricing advantages over those properties located inside the City of Calgary’s industrial market, they are now competing with a larger number of properties, located closer to suppliers, clients and employees. Expect to see prices decrease further over the coming year as competition for purchasers intensifies and the economy pushes price expectations back down. 2010 saw average sale price of $470,000 per acre for serviced land in Airdrie and $351,000 per acre in Balzac.
NOTABLE 2010 INDUSTRIAL SALES
New Industrial Development Speculative construction is once again being discussed. Hopewell, WAM, Oxford and Remington all have projects ready to commence construction this spring. Demand has started to increase and the supply of available space has decreased, especially for large-bay
Avison Young Calgary Industrial Market Report - March 2011
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product, and there is an abundance of available land ready to go. By the end of the first quarter of 2009, the flow of newly constructed industrial space into the Calgary market had stopped. With the exception of some owner/user projects, almost no construction has taken place in the last two years. This is good news for a market which is almost finished absorbing all the new space injected into the inventory. Assuming that a new development makes financial sense to all the parties involved, while the market may not immediately need space, as vacancy continues to decline, given the time required to complete a building for occupancy, the time to start building again will be here soon.
Industrial Building Sales and Investment The Calgary industrial market, as with most other property types, experienced an increase in dollar volume and number of transactions in 2010, over 2009. Total industrial sales for the year were $305 million in 47 sales. This is up 34% from the $228 million in dollar volume experienced in 2009 in 35 sales. The largest industrial deal in 2010 was part of the $2 billion portfolio transaction between Kingsett Capital Inc. and Alberta Investment Management Corp., and ING Summit Industrial Fund GP Inc. 7140 – 40th Street SE was sold in November 2010 for a purchase price of $30,084,923, which results in a price per square foot of $85. This 353,565 sf warehouse and office building is fully leased on a long-term basis to Gienow Windows and Doors Ltd., a manufacturing company owned by VKR Holding of Denmark, which owns and operates a global network of window and door manufacturing companies. There are early reports that strong sales will be recorded in 2011 as well, evidenced by the soon to be completed sales of Trammell Crow’s three AirFreight & Logistics Centre properties, containing 306,857 sf, to GWL Realty Advisors and GWL Realty Advisors’ sale of the 118,402 sf Deerfoot Distribution Centre (Xerox) to Crestpoint Investment Group. The 2010 average price per square foot was $118 (excluding condominium units), down 3% from the $121 psf average recorded in 2009. The average price per sale is $6.5 million, remaining the same as 2009. Owner-users have remained within this segment in the market, and currently comprise 32% of all industrial building purchases taking place, by number of sales, however investors are once again active in the Calgary industrial market. While 61% of the dollar volume transacting in 2009 was purchased by investors, 68% of the dollar volume in 2010 was purchased by investors. There have been indications in the market that many investors believe the bottom of the current economic cycle either has
Avison Young Calgary Industrial Market Report - March 2011
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been reached or will be reached soon, and now is the time to capitalize on the opportunities in the market.
Industrial Condominiums Prices are currently averaging between $160 and $205 psf for typical new construction bays (less than 4,000 sf ) inside the City of Calgary and $150 to $180 psf for secondary sales. Meanwhile, in areas surrounding the city the average price is between $135 and $180 psf. An abundance of newly completed industrial condominium buildings in the south and in Airdrie have driven prices down, whereas demand seems to be thriving in the north and east areas of the city causing prices to increase. There were 177 sales of industrial condominium units in the Greater Calgary Area in 2010, with a combined total price of $82.0 million. This is up 4% in dollar volume from 2009, which recorded $78.7 million in 151 sales. It is also down 23% in dollar volume from 2008, which recorded $106.4 million in 189 sales. Condominium ownership remains attractive for investors and those users who can safely predict their operational requirements for the next few years. Buying is going to make more sense for businesses which are more established, who want to be in one location long-term and who have the financial resources to take on a real estate investment.
Featured Avison Young Calgary Listings
www.avisonyoung.com
Wagon Wheel Business Park Up to 450,000 sf Balzac Industrial Build-to-Suit Opportunity
4447 - 46th Avenue SE up to 100,292 sf Southeast Industrial Leasing Opportunity
6110 - 44th Street SE up to 85,000 sf Southeast Industrial Build-to-Suit Opportunity
1891 - 15th Street SE up to 60,000 sf Central Industrial Leasing Opportunity
4907 & 4915 - 77th Ave SE 55,302 sf Southeast Industrial Building For Sale
4905 - 77th Avenue SE 31,790 sf Southeast Industrial Leasing Opportunity
6810 - 6th Street SE 26,220 sf Central Industrial Leasing Opportunity
31264 Highway 2A 26,184 sf Didsbury Industrial Leasing Opportunity
Calgary Industrial Leasing & Investment Team Norman Lippitt 403.232.4303 [email protected]
Doug Johannson 403.232.4314 [email protected]
Teresa Matys 403.232.4309 [email protected]
Jeff Buziak 403.232.4335 [email protected]
Kent Bacon 403.232.4330 [email protected]
George Marshall 403.232.4338 [email protected]
Steve Vesuwalla 403.232.4306 [email protected]
Manuel Verdugo 403.232.4328 [email protected]
© 2011, Avison Young Real Estate Alberta Inc. The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.
Avison Young Calgary Industrial Market Report - March 2011
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