March Market Report
Alberta March Market Report
With the hopes that a new decade would bring greater opportunities for the nation, it seems that the anticipation for a strong start to the year will be hampered by the growing spread of Coronavirus. In fact, global disruptions to supply chains and weakened tourism demand will likely reduce Canadian real GDP growth by 20 basis points (bps) to 1.2% in 2020. However, things could be much worse if the outbreak persists for a longer time period than currently expected. Financial markets are now realizing the imminent impact, and as a result, the S&P TSX has seen all gains made since the beginning of the year wiped out in just the last week of February alone. However, those that had the insight to transition their equity funds to gold at the beginning of the outbreak have seen a 12% return in just three months.
To make matters worse, the Canadian government is also dealing with anti-pipeline protests across the country in support of Wet’suwet’en hereditary chiefs. Many of the protestors have blocked national rail lines which have impacted deliveries of goods across the nation. CN Rail recently announced that it plans to temporally lay off 1,600 employees, or approximately 7% of its workforce, due to the instability the protests have caused. Additionally, the province took a major blow last week when Teck Resources Ltd. pulled its application for the $20 billion Frontier oil sands project in Northern Alberta. The project was expected to create 7,000 construction jobs, 2,500 much needed ongoing operational jobs, and over $70 billion in provincial revenues to bring down the province’s debt, which now expected to reach $87.8 billion by 2023. Premier Jason Kenney was quick to point fingers at the federal government indicating that the general atmosphere of lawlessness was one of the major reasons for the withdrawal, and if not rectified promptly will continue to jeopardize other major investments in Alberta.
With all this activity at the global and federal level, the provincial government also announced further upsetting news with the release of its tabled budget for the upcoming fiscal year, where it is expected to incur a $6.8 billion deficit. Luckily, core funding for health and education will be maintained along with capital expenditure plans for funding for the light rail transit projects in Edmonton and Calgary over three years. One major concern is that the province is betting on oil prices to recover over the next year but with Western Canadian Select now trading at just over $33 US per barrel, a 12.1% drop in just the last month, it may take much longer than expected for oil prices to recover. This again is being further compounded by reduced global demand for oil as a result of slowing economic activity due to Coronavirus.
Although there were some signs of hope for Calgary’s office market with Absorb Software signing a lease for 80,000 square feet within the Telus Sky tower, marking the 60% occupancy milestone, the city’s office sector is still struggling. In fact, the downtown vacancy rate has now risen by 380 basis points to 21.4% over the past 12 months, primarily due to the fact that four of Calgary’s major office buildings sit completely empty, including the 600,000 square foot old Nexen tower. Due to many tenants moving out at the end of their leases, the 24-month lease renewal rate in downtown Calgary now sits at 35.8%. In comparison, downtown Edmonton’s lease renewal rate is now at 67.5% while its vacancy rate has only shifted upward by 90 basis points to 9.1% year-over-year, though the availability rate has trended downward to 9.9%, narrowing the spread.
On the industrial leasing front, Edmonton led the way with the largest Alberta lease deal in February when the former Ford Motors warehouse was finally leased out. The 236,000 square foot facility was on the market for 14 months when spaces greater than 200,000 square feet are typically on the market for just under 18 months in Edmonton. This was likely due to the fact that the new tenant was able to secure a lease rate of $6.25 per square foot when the Edmonton average hovers just below $10 per square foot. Even though the largest leasing transaction in Alberta belonged to Edmonton, Calgary saw more transaction activity in February with 39 industrial leasing transactions occurring compared to only 13 in Edmonton.
Retail results are in and the holiday shopping season proved to be better than expected as Alberta saw retail sales increase by 1.0% in December compared to the previous month. Unfortunately, this was not enough for retail sales in Alberta to finish strong for the entire year, as overall retail sales declined by 1.4% in 2019, the largest decline across the nation. The decline in retail activity has not had a major impact on retail vacancy, as Calgary and Edmonton are posting vacancy rates of 3.2% and 4.2% respectively, but if retail sales continue to decline over 2020, we are likely to see an upward shift in these numbers. This is especially true due to the fact that Calgary and Edmonton have 2.2 and 1.9 million square feet of retail space currently under construction, respectively, with over 50% of this new space arriving by mid-2020. Retailers may hold off on leasing new space until the province is able to gain some major wins before Albertan’s consider opening up their wallets anytime soon.
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Photo & Content Credit: CoStar Canada