Industrial Insight Report Calgary & Area Q2 2016
Table of Contents Calgary & Area Overview 1 Calgary & Area Map 2 Submarkets Northeast & Balzac 3 Southeast 4 South Central 5 Contacts 6
Pricing Demand Supply Market Update Calgary & Area Q2 2016 Signs of optimism as the Calgary & Area Industrial market moves toward balance Lease Activity Demand for industrial space in the Calgary & Area markets have continued down a familiar path in the second quarter of 2016. With 150 lease transactions completed this quarter, the market experienced 28 more transactions than the previous quarter for a total of almost 1.3 million square feet. However, while activity was up, the additional transactions accounted for less than a 70,000 square feet increase in comparison to the previous quarter. Nevertheless, with the exception of Q4 2015, this was the most active the market has been out of the previous six quarters. Rental Rates Rental rates dropped for the fifth consecutive quarter in Q2. Although it was by a marginal 0.3 percent, it likely would have fallen further if not for the following reasons: first, the quality of new product coming onto the market is A-class in nature and tends to yield low op-costs, allowing owners to demand a higher net return; second, there is a surplus of manufacturing space on the market and despite saturation, this type of real estate will continue to command higher than traditional distribution rates due to its cost to build and above average yard capacity. Sales and Construction The industrial market experienced another quarter of high volume deliveries in Q2, with roughly 1.28 million square feet of new inventory being completed and only 647,000 square feet remaining under construction at the end of the quarter. Furthermore, as opposed to recent quarters, the majority of development is not purely in the big box spec category. Instead design builds, small to mid size condo projects and municipal assignments make up the majority of these projects. Market Outlook Even though rising big box inventory and large pockets of empty manufacturing space are pushing up vacancy and availability rates, we feel the market is well positioned to become a more balanced. As previously mentioned, spec development is down, leasing activity has been steady and if absorption stays moderately healthy, both supply and demand will begin to stabilize. Key market indicators 12-month rent growth (%) (3.3%) Arrows represent change from prior quarter Net new supply, Net absorption, vacancy 4,000,000 3,000,000 2,000,000 1,000,000 sf 0-1,000,000 Average net asking rate $10.20 $10.00 $9.80 $9.60 Total inventory (sf) 151,294,594 Total vacancy (%) 7.4% Total availability (%) 9.7% Q2 net absorption (sf) 213,970 2016 net absorption (sf) 671,590 Average net asking rate $9.70 Net new supply Total vacancy Net absorption $9.40 2,257 8.0% 6.0% 4.0% 2.0% 0.0% RECENT SALES COMPARABLES (sorted by square feet) Buyer Seller Location Intersection Size (sf) Date Price / sf Canadian Tire Sears Canada 25 Dufferin Place SE Dufferin Blvd SE 99,018 05/19/2016 $127 Camgill Development Spruceland Properties Inc. 4410 46 Avenue SE 44 th & 46 th SE 60,700 05/05/2016 $101 RECENT LEASE COMPARABLES (sorted by square feet) Tenant Landlord Location Intersection Size (sf) Wallmart Canada Kraft Canada (Sublease) 5801 72 nd Avenue SE 72 nd Avenue SE 252,966 Hopewell Logistics Piret 5805 51 Street SE 58 th & 51 st SE 144,475 JLL Market Update Greater Calgary Area Q2 2016 Page 1
MARKET CHARACTERISTICS Landlords willing to go the extra mile to maintain quality tenancies 1 Sales activity continues to be strong due to increased availability and continued low interest rates 2 Manufacturing space continues to be under pressure from the oil and gas market 3 Speculative construction slowing as the market looks to find stability 4 MARKET STATISTICS Property type Total inventory (sf) Total vacancy (%) Total availability (%) Q2 total net absorption (sf) 2016 total net absorption (sf) Average direct asking rent ($ psf) Under construction (sf) YTD completions Warehouse / Distribution 106,537,218 8.8% 11.0% 69,870 483,469 $9.49 592,000 2,024,630 Manufacturing 22,390,658 5.5% 7.0% 128,710 153,827 $11.15 55,000 47,638 Total Industrial 151,294,594 7.4% 9.7% 213,970 671,590 $9.70 647,000 2,072,268 JLL Market Update Greater Calgary Area Q2 2016 Page 2
Pricing Demand Supply Northeast & Balzac Lease Activity The Northeast & Balzac region continued to be active in Q2. With 47 transactions totaling over 450,000 square feet completed, this total exceeded the previous quarter. Seven of those transactions were above 20,000 square feet, which was a significant improvement from the previous quarter. Absorption was also well above average with 606,450 square feet of positive net absorption, with nearly 400,000 square feet resulting from Smuckers move to a new distribution centre in High Plains Industrial Park. The building was both delivered and almost entirely absorbed in Q2, with only 107,750 square feet remaining vacant, but likely to be absorbed by Smuckers in the future. Rent Rates Asking rates continued to decline in Q2 and we expect them to remain steady or fall further next quarter as top tier landlords with similar class A distribution space battle amongst each other to remain competitive. Sales and Construction 351,000 square feet of industrial product is currently under construction in the Northeast & Balzac submarket. This is drastically lower than the previous quarters total of 1.33 million square feet, proving why vacancy rose.07% despite being the recipient of substantial absorption. Notable deliveries in this submarket include buildings A and C of Bentall s Nose Creek Business Park (216,680 square feet and 187,710 square feet respectively) and building F of Hopewell s Airport Park comprising of another 96,200 square feet. Market Outlook Due to easy access to Calgary s major road networks and the industrial zoned areas being located minutes from the Calgary International Airport, developers have continued to choose the Northeast & Balzac area for large scale projects in recent years. Many of the new developments are on airport land, providing flexible zoning for a wide range of uses, most notably being recreational occupiers, which we have seen a substantial increase in. Traditional industrial users in the region are now sharing it with a diverse tenant mix in an area that continues to expand. This element adds a fresh economic aspect to the Northeast & Balzac area and is a trend we expect to continue with the City of Calgary becoming increasingly stringent on zoning restrictions. RECENT SALES COMPARABLES (sorted by square feet) Key market indicators 12-month rent growth (%) (1.4%) Arrows represent change from prior quarter Net new supply, Net absorption, vacancy 1,500,000 Net new supply Net absorption 1,000,000 Total vacancy 500,000 sf 0-500,000-1,000,000-1,500,000 Average net asking rate $9.50 $9.45 $9.40 $9.35 Total inventory (sf) 43,317,556 Total vacancy (%) 11.0% Total availability (%) 13.1% Q2 net absorption (sf) 606,450 2016 net absorption (sf) 695,410 Average net asking rate $9.34 $9.30 $9.25 2,257 Buyer Seller Location Intersection Size (sf) Date Price / sf 1967957 Alberta Inc. William Transfer Ltd. 7757 8 th Street NE 8 th Street NE 46,312 06/28/2016 $162 Olympia Development Corporation Shepard Jacksonport Ltd 10923 38 th Street NE 109 th & 38 th NE Land (1.95 acres) 05/10/2016 $871,795/acre RECENT LEASE COMPARABLES (sorted by square feet) Type Landlord Location Intersection Size (sf) New GWL 52 Aero Drive NE Aero Drive 54,750 Renewal Triovest 333 28 Street NE 28 Street NE 34,000 New Oxford 1610 104 Avenue NE 104 Avenue NE 19,656 11.5% 11.0% 10.5% 10.0% 9.5% JLL Market Update Greater Calgary Area Q1 2016 Page 3
Pricing Demand Supply Southeast Lease Activity The Southeast, Calgary s largest industrial market, had 47 transactions in Q2 for over 600,000 square feet space leased. Although significant, this represents a decrease of over 100,000 square feet from the previous quarter. The Southeast registered negative absorption for the first time following five consecutive quarters of positive absorption. This negative absorption was in large part a result of Smuckers relocating to the Northeast, leaving over 250,000 square feet vacant at their old location and Canrig vacating their 98,402 square feet of a manufacturing facility in South Foothills. However, 144,000 square feet in the former Smuckers space was leased by Hopewell Logistics in Q2, contributing to a continued positive outlook in the Southeast in Q3. Key market indicators Total inventory (sf) 64,756,446 Total vacancy (%) 6.2% Total availability (%) 10.1% Q2 net absorption (sf) (282,510) 2016 net absorption (sf) 289,220 Average net asking rate $9.30 12-month rent growth (%) (7.8%) Arrows represent change from prior quarter Rental Rates Asking rates fell only slightly in Q2 for similar reasons mentioned previously in this report (ie. quality of new space and brand of product). While asking rates on manufacturing product bring the overall average up, manufacturing space in general is approximately $2.00 per square foot below market rents from 2014. Taking all this into consideration and from a deal perspective, Landlords have presented extremely competitive rates in Q2. In the Q1 report, JLL highlighted that due to excess inventory and diversity in product age in the Southeast, many Landlords with older real estate would need to be extremely competitive on rental rates in order to complete deals. We witnessed this trend resonating in Q2. Net new supply, Net absorption, vacancy 2,000,000 Net new supply Net absorption 1,500,000 Total vacancy 1,000,000 500,000 0-500,000 sf 8.0% 6.0% 4.0% 2.0% 0.0% Sales and Construction Sale activity was average, if not low, in Q2, with less than five sizeable transactions completed. However, there are currently over 100 opportunities to purchase industrial real estate in the Southeast, 36 of which are owner/user related. We expect sale activity to stay steady or increase throughout the remainder of 2016 as the economy looks to become balanced and purchasers continue to benefit from low interest rates. Market Outlook The vacancy rate in the Southeast remains below average, with the area still trending as the most active region in Calgary. As this submarket has the highest percentage of manufacturing facilities in Calgary and as the market outlook is predicting an oil and gas recovery for the remainder of this year, we anticipate that if this recovery proves true, Q3 and Q4 in this submarket may prove to be its most active quarters in years. RECENT SALES COMPARABLES (sorted by square feet) Average net asking rate $10.50 $10.00 $9.50 $9.00 $8.50 2,257 Buyer Seller Location Intersection Size (sf) Date Price / sf Key Concrete Products 1397243 Alberta Ltd. 8615 48 Street SE 48 th Street SE 45,630 05/26/2016 $125 Camgill Development Corp. Spruceland Properties 2505 107 th Avenue SE 107 th Avenue SE 25,981 05/05/2016 $161 RECENT LEASE COMPARABLES (sorted by square feet) Type Landlord Location Intersection Size (sf) New Hungerford 10 Smed Lane Smed Land 67,000 Renewal Investors Group 4040 80 Avenue SE 80 th Avenue SE 26,160 JLL Market Update Greater Calgary Area Q1 2016 Page 4
Pricing Demand Supply South Central Lease Activity This quarter marked the second consecutive quarter of negative absorption for the South Central market. Despite 37 completed transactions, over 50 new lease opportunities were listed in this submarket during this quarter. This increased vacancy is due to several small to medium sized pockets of space versus one or two large vacancies. Several of these vacancies were over 15,000 square feet each, which is more than typically seen in this market. Vacancy rose eight basis points to 3.9 percent. Rental Rates Asking rates decreased by 4.9 percent from Q1 as landlords continued to be flexible in order to complete deals. This neighbourhood, while normally sought after, has seen some companies move to other areas of Calgary for the opportunity of lower rents and typically lower operating costs. The South Central market often sees higher operating costs due to increased property value assessments, resulting in higher property taxes. Sales and Construction 83,500 square feet was delivered to this market in Q2, the majority of which was Hungerford s Fairmore Business Park, totaling 58,500 square feet. This flex project is the newest development in this submarket, which has seen active sales. There are a number of owner/user buildings available for sale, which is abnormal for this market and therefore we expect to see increased sale transactions in Q3 and Q4 of this year. Market Outlook The average time-on-market increased to eight months in Q2, in contrast to just five months in Q1. Q2 was the first time this South Central market has seen a decrease in submarket absorption. As previously mentioned, operating costs have increased significantly in 2016, with the average at approximately $6.00 per square foot, which is significantly higher than the other submarkets. Overall due to location, this submarket typically sees the fastest recovery after a market correction, therefore we anticipate positive activity as the market stabilizes. Key market indicators 12-month rent growth (%) (8.7%) Arrows represent change from prior quarter Net new supply, Net absorption, vacancy 100,000 Net new supply Net absorption Total vacancy 50,000 sf 0-50,000-100,000-150,000 Average net asking rate $12.00 $11.50 $11.00 $10.50 $10.00 Total inventory (sf) 23,134,581 Total vacancy (%) 3.9% Total availability (%) 6.0% Q2 net absorption (sf) (129,210) 2016 net absorption (sf) (178,160) Average net asking rate $10.56 2,257 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% RECENT SALES COMPARABLES (sorted by square feet) Buyer Seller Location Intersection Size (sf) Date Price / sf Altess Investments Ltd. 1072546 Alberta Inc. 5632 Burbank Road SE Burbank Road 6,960 04/20/2016 $224 RECENT LEASE COMPARABLES (sorted by square feet) Type Landlord Location Intersection Size (sf) New York Realty Inc. 700 58 th Avenue SE 58 th 9,255 New PJS Holdings Ltd. 5030 13 Street SE 13 th Street SE 6,138 JLL Market Update Greater Calgary Area Q1 2016 Page 5
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