Diversification is Key to Expanding Calgary’s Industrial Real Estate Market

March 20, 2019

Despite a slow return to economic recovery, Calgary region’s industrial real estate market remains a hot bed for growth.

There’s no doubt the last few years have been tough for Alberta’s business landscape. A slow economic recovery, trade uncertainty, pipeline politics, changing regulations-all potential stressors that can impact business. As Alberta nears the two-year mark since the end of the recession, many businesses are adjusting to an evolving and diversifying economy and the opportunities that come with it.

While our industrial market began diversifying away from oil and gas in the mid 1990s, once that momentum began, it has never slowed and, if anything, it has actually picked up speed in the last several years.

One key factor worth considering, in our diversified economic growth, is that despite a slow economic recovery after the recession, there is still a significant amount of disposable income within the Calgary region. As household buying power still allows for the purchase of electronics and other consumer goods, those products will need to be warehoused somewhere. Pair this with a constantly evolving e-commerce industry and the drive to provide faster delivery times in a highly-competitive entrepreneurial space and you’ll quickly find key players in the e-commerce sector are opening facilities at a rapid pace to keep up with consumer demands.

We also have diversified sector growth depending on large amounts of real estate space, such as cannabis and alternative food production and processing, technology, manufacturing (both in and out of the oil and gas space) and sports and recreation facilities throughout the area. To give you a picture of just how unique these opportunities are, in 2018 we sold an oil and gas manufacturing facility to a wind turbine manufacturer and a former pallet manufacturing building to a software development organization. This diversification helps to build capacity and employment opportunities, making it a crucial driver to growth in the region over the last several years.

And finally, let’s not forget that Calgary is well established as the distribution and logistics hub for serving not only Western Canada, but regions in the U.S. given our driving proximity (a huge benefit for our transportation industry), location on the Canamex corridor and airport cargo infrastructure. Because we serve such a wide population base, we are able to avoid the risk of the massive economic swings that come with the oil and gas sector.

Location, Location, Location

A southern Alberta hamlet says it's ready to accommodate potentially thousands of new employees from the Alberta workforce as large and credible developers are constructing state-of-the-art industrial spaces based on interest from enterprise level distributors and retailers, putting Balzac, Alberta on the map in a very big way.

For example, Amazon, the online e-commerce giant has opened applications for 1,000 jobs at its soon-to-open facility in Balzac. The facility, known as a fulfilment centre, may employ up to 3,000 people when operating at full capacity.

Decision-makers for major companies such as Amazon, Walmart, Sobeys, and more are very advanced in their location and cost modelling and have chosen Balzac with a lot of factors taken into consideration. For instance, its proximity to major highways lowers transportation costs, the cost of land is lower, as are property taxes and there is no business tax in the hamlet.

Balzac itself is so small, its population isn't tracked by Statistics Canada. The unincorporated hamlet is in Rocky View County, home to just under 40,000 people, according to the 2016 census, and they're spread across almost 4,000 square kilometres. But we like to say activity brings activity and Balzac certainly has a lot of momentum behind it.

Even the Condo Market is Diversifying Through Industrial Real Estate

There has been a significant absorption of many industrial condo projects in our market in the last number of years. This has predominantly come out of the need to serve a niche market in our city by building or repositioning industrial condo properties. Several highly credible and reputable developers have stepped up to the plate, building good quality product for long-term ownership.

A considerable amount of interest in this area has been from Vancouver-based purchasers looking for opportunities with lower costs and increased supply. They’re constructing facilities that service different business needs, such as dock-height or grade-level loading, and different bay sizes that cater to both small and enterprise level organizations.

This development is helping to create ownership opportunity for businesses that would normally be leasing because they either can’t afford or don’t want the commitment of having to build their own freestanding building. Purchasing a unit, or several within a much larger complex creates economies of scale and lower operating costs as they are shared among multiple businesses. For these business owners, they’re looking at the investment opportunity as a means to owning for the same, or just slightly higher costs of having to lease. It’s a means of growing equity affordably, allowing for long-term financial planning for succession and other financial objectives.

Forecasting 2019

Our market experienced approximately 2.5 per cent positive growth in occupied space last year, which demonstrated confidence in our market from both owner/users and tenants looking to either grow or establish themselves in Calgary. We expect this year to be similar to last in terms of activity and if January and February were any indication, we’re in for a very robust 2019.

While those numbers might not raise the roof, from an industry perspective, growth like this is considered reliable and sustainable. The five to six per cent growth we saw in previous boom years throughout the Calgary region can bring concerns surrounding sustainability, inflation or reduced supply for organizations looking for space.

With investors and developers showing confidence in the area by constructing new, large, state-of-the art distribution facilities on a speculative basis, meaning no pre-leasing, we can expect to see an increase in our vacancy rate from the low five per cent range to something into the six range. Though because of these industry-leading developer’s in-depth understanding of consumer markets, this vacancy increase will be less a concern, and more a sign of confidence in long-term industry growth.

We can't forget that this city was built from entrepreneurs in a whole different era. There is an entrepreneurial spirit at the heart of Calgary’s history. If our diversified sector continues on it’s path of substantial and innovative growth, that spirit will be key for charting the course towards our economic future.

Chris Saunders is senior vice-president, Industrial Sales and Leasing, for Jones Lang LaSalle (JLL) in Calgary.

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