Calgary’s industrial real estate market was quite active in 2019, with 3,994,835 square feet of new inventory coming to market and more than 500,000 square feet of new space in the construction pipeline, signaling a significant development cycle within the city.
JLL’s Q4 Industrial Outlook for 2019 explains that this total construction cycle of 4,494,835 square feet is in response to consistent demand from distribution, manufacturing and service companies in theGCA. Demand from these companies is an indicator of occupiers’ confidence in our market and the need to have a presence in our economy. Demand for distribution inventory specifically continues to be high, driven by regional consolidations into the GreaterCalgary Area, 3PL warehousing, and the rise of e-commerce operations throughout the city. Hopewell Logistics leasing of 188,071sf in SE Calgary in 2019 is an example of this 3PL demand.
To meet demand, new supply must be constructed, which is also an indicator of investor and developer confidence in our market. Speculative construction would not exist without a high level of long-term confidence in our market by the owners and developers of these properties. These companies believe in Calgary, in Alberta, and that their investment dollars will generate their required return due to continued demand from tenants. Examples of industrial speculative developments completed in 2019 include Morguard Investments/Verus Partners developing Grasslands Logistics Centre, a 214,112 sf logistics facility in SECalgary, and One Properties development of three new warehouse buildings in NECalgary totaling 514,253 square feet.
A second indicator of strong investor confidence in our market is exceptionally high demand for income producing industrial properties. The ability to purchase existing leased industrial assets in Calgary is very challenging as these types of buildings rarely come to market for sale, most owners wish to hold their industrial buildings inCalgary versus selling them. When they do come to market, it is typically through a bid process and several competing offers are usually presented. An example of a large investment transaction in our province in 2019 was Summit REIT purchasing 37 industrial buildings for $588 million. Fourteen of those properties are in Calgary, totaling 1.4 million square feet.
Investors are also seeing opportunity inCalgary’s older generation industrial segment, a third indicator of investor confidence. Some landlords have been taking the opportunity to refresh and update their properties, provided they are not functionally obsolete. “What we’re seeing in the sector is that these older spaces are fast becoming a valuable asset class among investors, and that’s due to a surge in demand for rental space that can be tailored to a tenant’s needs,” shares Carey Koroluk, Associate Vice President with JLL. “For example, by upgrading the sprinkler system to ESFR and lighting to LED on properties that are still functional, you can create a more modern facility that can better compete with new product, and is more attractive financially,” he added. “Many older warehouse properties that are less functional are being repositioned altogether, to quasi-retail showroom/storage space for example, so they are also attractive to certain investors.”
It is expected that Calgary’s industrial real estate market will continue drawing interest and demand from both occupiers wanting to position themselves in a growing industrial economy, and investors/developers wanting to cash in solid market fundamentals and consistent return on investment in 2020 and beyond.