January 2020 Market Report
With a new decade upon us, Alberta is hoping that the New Year will bring greater opportunities for the province as GDP is forecasted to grow by 1.6%* in 2020, up from the projected 0.6% in 2019. However, before things can make a turn for the better, Albertans will welcome a wave of new fees and taxes in 2020 ranging from increased property taxes, higher tuition fees and even higher gas prices at the pump. Specifically, with the introduction of the federal carbon levy, Albertan’s can expect to see a 4.4 cent increase per litre along with a $1.05 increase per gigajoule for natural gas. To make matters worse, Calgarians are expected to see the burden of property taxes shift away from commercial to the residential segment, ultimately causing residential property taxes to increase by an average 7.5%. Edmonton is expected to fair slightly better, only seeing a 2.6% increase on residential property taxes, however, the increased cost of living is expected to keep consumer spending across Alberta below 2% in 2020.
This all comes at a time when the Strategic Group sought creditor protection for 56 of its 171 commercial properties back in December, delivering another blow to the real estate sector just before the end of the year. Combined, the 56 properties cover 3.7 million square feet, or approximately 49% of the Group’s portfolio. Even after converting seven of its office buildings in Calgary to apartment rentals, it was not enough to overcome a struggling energy sector, which has contributed to downtown vacancy closing at 18.7% in 2019. Now that the properties have been placed into receivership, it is expected that some of these properties will be sold to get the company back on track as it has seen revenues decline rapidly over the past five years due to tenant default and move-outs.
Currently, average office market prices seem to have bottomed out, after dropping by 10.4% in 2019 to $185 per square foot. For those looking to acquire office assets in the downtown core, this may be one of the best times to enter the market for those that have a long-term investment horizon. Average market prices in downtown Edmonton have also faced similar declines, dropping by 9.0% in 2019 to $233 per square foot, however, Edmonton does not face the same magnitude of problems as Calgary, with downtown Edmonton office vacancy at 9.4%.
Although the Calgary and Edmonton industrial markets don’t face the same challenges in terms of vacancy as their respective office markets, average rents and market prices continue to fall. In fact, out of all major markets in Canada, Calgary and Edmonton were the only two cities to see average industrial rents decline in 2019, down by 4.3% and 6.6% respectively. Moreover, average market prices dropped by 6.6% in Calgary to $145 per square foot while Edmonton saw average market prices decline by 7.8% to $136 per square foot. On the bright side, Hungerford Properties was able to offload Icon Business Park after an extensive repositioning strategy from a single-occupier to a multi-tenanted building just before the end of the year. At the time of sale, Hungerford was able to bring occupancy up to 98% while the rest of the market was facing a vacancy rate of 7.6%, up 210 bps compared to December 2018.
Latest retail data saw Alberta sales increase by 0.4% in October compared to the previous month, however compared to October 2018 sales were down 0.2%. Although retail sales have remained fairly stable over the last year and vacancy rates have remained relatively strong in both Calgary and Edmonton when compared to other asset classes, not all retail properties have been performing at the same level. For example the New Horizon Mall in Calgary is still struggling to fill many of the empty condo units after its first year of operation. Modeled after Pacific Mall just outside of Toronto, the mall has an occupancy rate of approximately 27%. Due to the lack of international and luxury retailers the mall has faced challenges increasing foot traffic, but with the introduction of two anchor stores, management expect to increase occupancy up to 50% by the end of 2020. In comparison, Pacific Mall took two years before all of its units were occupied, however, the New Horizon is expected to take up to four years, and likely more, due to the weak economy. Mall management is trying to combat these challenges via tenant inducements that include free rent up to one year and significant breaks on utilities and other costs, however, with consumers more interested in global brands and online shopping, this form of retail development has a lot of obstacles to overcome other than a weak economy.
*Last 30 days
Photo & Content Credit: CoStar Canada