December Market Report
With the holiday season upon us, Albertans will gladly welcome a fresh start in 2020. From the symbolic blow of Encana announcing its head office relocation to the United States to the dreaded release of the UCP budget, Albertans have had their fair share of disappoints. Even with the approval of the Trans Mountain pipeline, Alberta will need to make vast strides on the Keystone XL pipeline and the Line 3 expansion before the province will see economic growth above two percent. Furthermore, the Trans Mountain pipeline is still hampered by the Oil Tanker Moratorium Act (aka Bill C-48) that effectively bans oil shipping from ports in northern British Columbia. However, the Eagle Spirit Energy Corridor Chiefs’ Council is proposing a four-pipeline corridor that would circumvent these restrictions and ship crude oil and liquefied natural gas (LNG) from Alberta to tidewaters through Alaskan ports. If the proposal is successful, this would no doubt improve the economic outlook for Alberta.
The current economic outlook remains cloudy, and to make matters worse, Calgary’s commercial property tax rate is rising faster than any other major market in Canada. In fact, commercial property taxes are now 13.3% higher than in 2018. Comparing, the commercial property tax rate to that of 2015, Calgary has now seen a whopping 55% increase. Additionally, the commercial-to-residential property tax ratio also saw a drastic upward shift, increasing by 8.3% to a ratio of 3.31, ultimately placing further pressure on the commercial segment. The mill rate for commercial properties has been increasing for the past six years and has been the result of major declines in commercial real estate values, particularly in the downtown core.
This will ultimately increase the burden on other segments outside of the office market including smaller scale retailers and industrial sites which have not necessarily seen drastic declines in assessed values. For those areas that have not seen decreases in assessed values, or perhaps even experienced increases, the increased property taxes will only make it more difficult to operate in 2020. The City of Calgary has attempted to offset the impact for these businesses by creating a $131 million rebate program, however, this will only provide temporary relief. Luckily, for Edmonton’s more diversified economy, property taxes have not increased as dramatically as in Calgary, and are expected to grow by just under three percent, however, this is still significant.
Along with the gloomy outlook for the province, Calgary’s office market is expected to post its third consecutive quarter of negative absorption in Q4 2019. As a result, the Calgary office vacancy rate has increased from 14.9%, at this time last year, to 15.3% at the end of November, and is expected to trend upward closer to 16% at the end of 2019. This coupled with deliveries reaching 771,000 square feet of new office space, including TELUS Sky, Calgary is not expected to see any major declines in vacancy in 2020.
In contrast, as of the end of November 2019 Edmonton’s office vacancy rate was 8.0% but is expected to close out 2019 at 7.8% and will continue to trend downward throughout 2020 to 7.4%. Contradictory to Calgary, Q4 2019 for Edmonton is expected to be the third consecutive quarters of positive net absorption. Furthermore, Edmonton is experiencing minimal construction activity, and therefore new leasing activity will be primarily focused on existing stock. One common factor among both Calgary and Edmonton is the need for these cities to focus on diversifying their economic base over the coming year to attract tenants outside of the energy sector, thereby stimulating further demand for their respective office markets. On this vein, Edmonton is doing a good job attracting artificial intelligence companies, and both cities are pinning their hopes on attracting additional high-tech companies.
On the industrial front, Calgary continues to welcome new developments as there is currently 1.6 million square feet under construction. With lower taxes and a favourable development approval process, many cost-conscious tenants have found Calgary and, Rocky View County, an ideal place to locate. Tenants looking to secure long-term leases are also demanding newer more efficient spaces and Calgary and Edmonton have sufficient land stock to accommodate this growing need. With lower servicing costs and an abundant labour pool due to the higher provincial unemployment rate, Alberta is an ideal location. Industrial vacancy in Calgary and Edmonton currently sit at 7.3% and 5.9%, respectively. Although Calgary is expected to see vacancy trend upward in 2020, the decline in rents by 3.9% in 2019 to $9.47 per square foot will likely make the market more appealing for tenants to secure space. Similarly, Edmonton is expected to see net rents decline by 6.3% in 2019 to close out the year at $9.84 per square foot.
Similar to the industrial sector, retail rental rates are also expected to decline year-over-year in Calgary and Edmonton by 0.4% and 5.0%, respectively, by the end of 2019. However, demand remains relatively strong in both cities. Based on the relatively strong leasing activity in the retail segment Calgary will close the year with a vacancy rate of 3.6% while Edmonton is expected to close at 4.2%. Demand from the cannabis sector will remain strong in 2020 in Alberta as evidenced by Edmonton welcoming Aurora Cannabis’s 11,000 square foot flagship store within West Edmonton Mall. The first of its kind in a major mall, the store will serve a dual purpose as a retail store and an immersive experiential space, encouraging visitors to explore unique products and participate in a rotating calendar of programming and events. As a major cannabis producer, Aurora is the first producer to vertically integrate into the retail sector and the flagship store will likely act as a model for future store openings not only by Aurora but other major producers in the industry.
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Photo Credit:: Image by skeeze from Pixabay
Content Credit: CoStar Canada