The Canadian Real Estate Market- A Safe Haven for Growth

“Buy land, they’re not making it anymore”- Mark Twain

Despite Mark Twain’s investment advice, sometimes real estate markets can tell us more than simply that nobody is ‘making’ land anymore. The real estate market in a particular location can also be seen as a bellweather for an area’s economic fortunes. The more demand for people to have property in a particular area, the logic goes, the more likely the chance of current or future economic growth. With this logic in mind, an examination of real estate markets in Canada may give oil and gas professionals a better idea of potential growth in Canada, especially if a company if considering expanding or opening new offices within a major Canadian city. What are the major trends in Canada’s real estate market, and what should oil and gas professionals take away from these trends?

The first and most important trend for professionals to take away is that Canada’s real estate is acting as an island for investment. The market needs to be examined within the context of the global economy as a whole. Broadly speaking, the Canadian real estate market as a whole has strong fundamentals, with steady demand fueling consistent growth in the recent years. This trend of reasonable growth is expected to continue into the near future. Variables in the Canadian market all point towards this steady overall growth: vacancy rates are down, rents are rising, investment levels in the industry are high (investments in Real Estate Income Trusts, or REITs, is particularly important for the Canadian market). When viewed from this international perspective, Canada seems likely to remain an economic island of stability in a turbulent world. The following chart illustrates the vacancy rates for the Canadian market overall, as well as major Canadian cities.[1] This data shows that the overall vacancy rate is expected to remain stable, while shifting up or down slightly within individual cities.

This shifting within individual cities leads to a second takeaway for industry professionals the Canadian real estate market: growth is largely expected to come from Western Canada specifically, while Eastern Canadian real estate is expected to remain relatively consistent. CBRE Ltd., a commercial real estate services company, estimates that Calgary, Vancouver, Edmonton and Winnipeg absorbed 3.5 million square feet of office space in 2012.[2] This works out to being 76.6% of the total expected increase in the year, showing that growth is heavily concentrated within these specific cities. While this growth will cool slightly to 42.1% in 2013, it still suggests that these are the key cities in the country that are experiencing growth in their real estate markets. This is a key lesson from the Canadian real estate market, as many of the cities that oil and gas companies may want to expand into will be based in these Western cities like Calgary, Edmonton, or Vancouver.

A third takeway for professionals is the high levels of investment present in Canadian real estate markets. Looking at the year ahead, it is important to emphasize how low interest rates could affect Canada’s real estate market. Real estate, being such a capital intensive industry, benefits enormously by having access to low interest rates that are designed to stimulate borrowing and economic investment. Seeing as this favorable borrowing climate is likely to remain the same in 2013, this suggests high levels of investment in Canadian real estate will continue.

Investment income is up as well in the Canadian market as a whole: $28.1 billion was invested in the market in 2012. This is up 18.6% from investment in 2011, and is only expected to grow further. The following chart helps to demonstrate which types of real estate investment have changed in recent years.[3] Finally, all this investment does translate into a tangible sign of growth in Canadian real estate in 2013: an estimated 16.2 million square feet of office space is being constructed in Canada, up 8.9% from 2012. This high level of investment and construction suggests that growth prospects will continue to be steady in the short to medium term in Canadian real estate.

Looking at the Canadian real estate market from the national perspective can obscure important trends that affect markets in local cities. Below are some short profiles on the local real estate markets within individual cities that are linked to the oil and gas industry:

• Calgary: Calgary’s real estate market was especially active in 2012. Demand from an already active oil and gas industry has spurred new construction within the city, particularly within the downtown core area. This demand is only expected to increase as Calgary becomes an even more important city for the Canadian oil and gas sector.
  • Office space within Calgary is dominated by oil and gas firms and headquarter buildings. These energy firms are driving downtown purchasing in the short to medium term. As such, vacancy rates in the downtown core are expected to trend downward, but could raise slightly in the area just outside Calgary’s downtown area, resulting in an estimated 1 million square feet of inventory to this area.
  • Two current construction projects, the Eighth Avenue Place West tower and the Calgary City Centre, are expected to add a 1.7 million square feet of office space within Calgary.
• Edmonton: Overall, Alberta’s strong economy will benefit and push up the Edmonton real estate market. New construction and transportation corridors, linking central Alberta and Fort McMurray and estimated to be worth up to $184.5 billion, will benefit the city as a central area in these corridors. Both the provincial economy and these construction projects will likely push up real estate demand for Edmontonians.
  • Vacancy rates have dropped in while rental rates have risen in 2012. Vacancy rates are expected to continue to drop in 2013, while rental levels will plateau.
  • Energy firms such as ATCO or Enbridge are seen as key players in the market for downtown office space, as is the Alberta provincial government.
• Halifax: Halifax is experiencing a slowdown in relative terms, in comparison with previous years of higher levels of growth. This is likely linked to the slow shutdown of EnCana’s Deep Panuke offshore natural gas project. Despite this relative slowdown, local shipbuilding contracts are still expected to stimulate demand in 2013.
  • Halifax’s office space market is characterized by a unique split between the downtown and suburban markets. Suburban areas have lower vacancy and subletting space than the downtown core, which has higher vacancy levels.
  • The suburban areas for office space faced growth of 5.9%, pushing down vacancy in the downtown area.
  • Looking at the city as a whole, the vacancy rate for office space increased to 9.7% from the 8.5% increase at the end of 2011. This is only expected to rise up to 10.7% in 2013.
• Regina[4]: Saskatchewan’s economic growth, fueled by the province’s natural resources, helped to strengthen Regina’s real estate market in 2012. This growth was so high that the city approved 48% more building permits last year than in 2011. This growth is expected to slow somewhat in 2013, but continue to still be steady.
  • Office space continues to be valued in Regina’s downtown core, with 39% of new construction in Regina being comprised of Class A office buildings.
  • These Class A office buildings have a vacancy rate of 1.42% in Regina. This is the lowest vacancy rate for this type of office space within North America.

Broadly speaking, real estate markets in Canada appear poised for modest growth in 2013. The three broad trends examined above- Canada acting as an island of stability in an international market, the regional differences between different areas of Canadian real estate, and steady levels of investment in the industry help suggest this continued steady growth in Canada’s real estate. While individual cities may have their own different quirks and characteristics, each city profiled above that is linked to the energy industry is also expected to experience some growth. As energy companies consider entering the Canadian market, these real estate trends may continue to act as a bellweather for the Canadian economy as a whole, and suggest that Canada may be a great place for investment or expansion in 2013 and beyond.