Commercial Real Estate Market Overview

Calgary

Covering an area of 742 kms, Calgary is the fourth largest city in Canada and the largest in Alberta; it has a population exceeding 1 million.  Economic activity in Calgary is primarily centred on the petroleum industry; however, agriculture, tourism and high-tech industries also contribute to the city’s economic growth.  Unemployment in Calgary at the end of Q4-2009 was 6.9% down from 7.2% in Q3-2009, well below the Canadian average of 8.5%.

Calgary – Downtown Office

Calgary’s downtown office market experienced a considerable increase in vacancy and decline in rents during 2009 due to the combination of oil and gas companies, significantly reducing demand for office space and the blitz of new office supply delivered to the market.  Calgary’s downtown office inventory is now just over 36 million square feet, with an additional 2.7 million square feet (The Bow and Eighth Avenue Place) currently under construction and expected to be added to inventory in 2012.

At the end of Q4-2009, overall vacancy was 15.5%, up 10% from one year ago.  Sublease space continues to be a huge contributor as it represents 47.0% of the current overall dowtown vacancy.  The largest sublease vacancy to enter the market in 2009 was Suncor Energy’s 418,000 SF in Sun Life Plaza,  a result of the Suncor – Petro Canada merger.  Vacancy by building Class AA, A, B, C and D at the end of 2009 was 10.6%, 15.2%, 19.0% and 17.3%, respectively.

The rapid rise in vacancy and weakened demand for office space created negative pressure on rental rates throughout 2009.  Rental rates are expected to continue to decline into 2010, albeit at a slower pace, as overall economic conditions slowly improve.  Average asking net rental rates by building Class AA, A, B, C and D at the end of 2009 were $34.25 PSF, $21.39 PSF, $16.92 PSF, $13.42 PSF and $12.29 PSF respectively.

Landlords have no option but to respond to rising vacancy and falling rental rates by providing sizeable tenant inducement packages, presenting a good opportunity for tenants to renegotiate leases as many landlords are willing to secure tenants for a longer term.  Looking ahead, with capital markets improving and oil and gas prices stabilizing, Calgary’s downtown office market may see a slight nominal demand for space in 2010.  However, with 2.7 million square feet of new supply being added to inventory in 2011 and 2012, vacancy is still anticipated to escalate.

Calgary – Suburban Office

The suburban office market in Calgary experienced more leasing activity during the last quarter of 2009 than in the previous three.  Inventory has increased to over 20 million square feet during the past year and can be divided into five submarkets: Beltline Office (24.8%), South Central (15.9%), South (20.3%), Northeast (29.0%), and Northwest (10.0%).

Overall vacancy rose for the eleventh straight quarter in the suburban office market, reaching 15.7% at the end of Q4-2009.  The majority of vacancy was seen in the Beltline, South Central and Northeast submarkets.  Sublease space was not as significant a factor as in the downtown market, as it only contributed to 4.2% of the overall vacancy.

On average, overall asking rates in the suburban office market decreased by 15.9% during 2009.  The highest asking net rental rates at the end of Q4-2009 were in the Beltline at $22.46 PSF, followed by the Northwest at $20.90 PSF.  South Central reported rates of $17.39 PSF; the Northeast and South submarkets reported $14.83 PSF and $19.77 PSF, respectively.
Many landlords were exposed to rising vacancy rates, re-financing requirements, and increased competition from new supply in 2009; this trend is expected to stabilize in 2010.  Many suburban lease transactions in the Q4-2009 were completed as a result of landlords being aggressive by offering to absorb trailing lease obligations, offering large inducements and turnkey packages, or simply reducing face rates.  In contrast to the downtown office market, new supply forecasted to be added to suburban inventory over the next few years is limited. This will be a contributing factor to stabilizing vacancy and rental rates in Calgary’s suburban office market.

Calgary – Industrial

Calgary is one of the primary distribution markets in Canada, alongside Toronto and Vancouver, as it sits at the junction of the Canamex highway system (linking Canada to Mexico through the United States) and the TransCanada Highway.  The city’s industrial inventory has grown to be over 114 million square feet, 98% of which is allocated to three primary submarkets: Northeast (33%), South Central (24%), and Southeast (41%).  The northeast and southeast submarkets consist of a quality mix of logistics, distribution and manufacturing tenants, while the southcentral market focuses on service related tenants in smaller bays.  Calgary is comprised of a well balanced industrial market with small bay (1,000 SF to 10,000 SF), medium bay (10,000 SF to 40,000 SF) and large bay (40,000 SF+) options, making it fully capably of catering to all tenant sizes.

Industrial vacancy in Calgary increased for the eighth straight quarter to 5.2% (16.0% of which is sublease) at the end of 2009 from a low of 0.8% in 2006.  Increases in vacancy, quarter-over-quarter, have become less significant, showing signs of stabilization in this asset class.

Calgary industrial net rental rates range from $5.00 PSF to $6.50 PSF for large bay product, $6.50 PSF to $8.50 PSF for medium bay product and up to $8.25 PSF to $10.00 PSF for small bay product.  The average overall asking lease rate at the end of Q4-2009 was $7.50 PSF and is expected to stabilize in the first half of 2010.

New development of industrial product in the final quarter of 2009 was primarily owner-user or small industrial condo projects.  No new multi-tenant construction is expected in the industrial sector until the market absorbs existing vacancies in newly developed buildings.  Therefore, going forwards, new development of industrial buildings will be limited to tenant driven demand.  The Calgary industrial market is anticipated to remain stable and will continue to rank high on the list for investor demand.

Edmonton

Edmonton, the capital city for the province of Alberta, is the largest metropolitan area in Northern Alberta, with over 1 million people and 70% of the region’s population.  The city serves as the northern anchor of the Calgary-Edmonton corridor and is a staging point for large-scale oil sands projects in the northern part of the province.  Unemployment was 7.6% at the end of Q4-2009 up from 6.5% in Q2-2009, still below the Canadian average of 8.5%.

Edmonton – Downtown Office

Edmonton’s downtown office inventory is just over 14 million square feet which can be divided into two submarkets: Financial (66%) and Government (44%).  Rising vacancies, decreasing rental rates and increasing sublease inventory in the latter part of 2009 began to put pressure on landlords.  With many companies downsizing, it is expected that this trend will continue well into 2010.

The city’s overall downtown office vacancy rose from 5.5% at the end of 2008 to 7.9% at the end of 2009 with sublease vacancy tripling from 61,193 SF to 188,252 SF, making up 17% of the overall vacancy.  Larger sublease vacancies to enter the market in 2009 were Telus’ 70,000 SF in Telus House, IBM’s 36,000 SF in 44 Capital Blvd., and RBC’s 16,000 SF in the Royal Bank Building.  At the end of Q4-2009, vacancy in the Government submarket was 9.3% with the majority in “A” Class product; the Financial submarket experienced vacancy of 7.2% with majority in “C” Class product.

As a result of rising vacancy, overall average downtown net asking rates decreases in 2009 from $24.32 PSf to $22.93 PSF.  Additional large blocks of sublease space are expected to hit the market in the first half of 2010, placing even more pressure on landlords.

Edmonton – Suburban Office

The suburban office market experienced substantial development during 2005-2007 due to the growth in the engineering, construction, oil/gas and public service sectors.  Yet, in 2009, these sectors haulted all expansion and alternatively began to downsize, adding sublease space to the market.  Edmonton’s suburban office inventory is just over 8 million square feet, divided into seven different submarkets: 188 Avenue/Kingsway (12%), 124 Street (10%), 149 Street (7%), Eastgate (11%), Southside (38%), Westend (15%) and Whyte Avenue (7%).
Increased sublease space and new construction contributed to vacancy as it went from 4.8% at the end of 2008 to 12.3% at the end of Q4-2009.  All Edmonton suburban submarkets experienced double digit vacancy with the exception of 118 Avenue/Kingsway, 149 Street and Whyte Avenue – all three having vacancy rates below 5.0%.

Overall, average asking net rental rates marginally decreased to $18.21 PSF at the end of 2009; this average is skewed due to the number of new buildings added to inventory over the year with relatively higher asking rates.  Landlords experiencing vacancy in newly built product are predicted to lower rental rate expectation throughout 2010, resulting in a more noticeable downward trend going forwards.

It will be critical in 2010 for landlords to maintain their existing tenant base and ensure they successfully renew tenants with upcoming lease expiries, as there will be many more options at lower rents to choose from in Edmonton’s overall office market.

Edmonton – Industrial

Edmonton is known as a secondary distribution market. Larger distributions tends to be out of Calgary, Vancouver and Toronto. Industrial inventory in Edmonton is over 96 million square feet, 79% of which is controlled by two of the six submarkets: Northwest (38%), Southside (41%), Northeast (1%), Central (6%), Misku/Leduc (9%) and Acheson (5%).  The northwest submarket is primarily logistics, distribution and manufacturing, whereas the southside submarket focuses more on manufacturing and oil/gas related distribution.  Edmonton’s industrial mix can be divided into small bay (2,500 SF to 5,000 SF), medium bay (5,000 SF to 15,000 SF), and large bay (15,000 SF+) tenancies.

Overall vacancy levels in Edmonton’s industrial market are relatively low, increasing from 2.9% at the beginning of 2009 to 3.8% at the end of Q4-2009.  As with all other asset classes, sublease space was not a factor prior to the global economic chaos experienced 18 months ago, but today it contributes to 20% of Edmonton’s total industrial vacancy.

Average rental rates for older industrial product range from $4.00 to $5.00 PSF for large bays, $5.50 to $6.50 PSF for medium bays, and up to $7.50 to $8.50 PSF for small bays. Newly-constructed medium and large bay product typically demand a $3.00 to $5.00 PSF premium over older product.

1.37 million square feet of new industrial inventory was added in 2009, primarily owner-user

buildings or small industrial condo projects during Q4-2009. Only 100,000 SF is under construction at the start of 2010. Development levels are expected to remain low until the market has absorbed the newly constructed vacancy and backfill space created by tenants moving to newer product.  With no new major developments on the horizon, tenants will have limited options when looking to relocate, positioning Edmonton undustrial landlords in a considerably better situation than others across Canada.

Halifax

Located on the eastern coastline of Nova Scotia, Halifax has a population just shy of 400,000, 40% of the province’s population.  Major industries include manufacturing, mining, fisheries, tourism, agriculture and government/military services.  Unemployment at the end of Q4-2009 remained at 6.4% for the second consecutive quarter, well below Canada’s average of 8.5%.

Halifax – Office

The total Halifax office market consists of over 10 million square feet of space broken into two major submarkets: Downtown (43%) and Suburban (57%).  The city’s vacancy rate increased from 9.2% at the end of 2008 to 10.2% at the end of Q4-2009.  The 100 bps increase represents less of a year-over-year increase than most office markets in Canada.  Furthermore, Q4-2009 overall office vacancy was unchanged from Q3-2009, demonstrating the first flat quarter since Q3-2008 and indicating stability in the Halifax office market.  Sublease space accounted for 36.3% of total vacancy; however, as the economy rebounds, it appears the recent trend of increasing sublease space has subsided.  At the end of 2009, vacancy in the Downtown and Suburban submarkets were 7.0% and 12.6%, respectively.

Large amounts of sublease space softened asking rates in 2009 which have now stabilized.  Average Class A asking rates in Downtown were $18.64 PSF and Class A asking rates in the Suburban market were $16.13 PSF at the end of Q4-2009.

A few new construction projects are forecasted to commence in 2010.  TD Centre’s 100,000 SF expansion is expected to move forward within the next few quarters; the Armour Group will begin construction on the 30,000 SF expansion of the Medavie Blue Cross Building, and the Halifax regional School Board is expected to amalgamate two offices (Dartmouth and Cole Harbour locations) and take occupancy of its new office space in late 2010.

Halifax Industrial

The Halifax area industrial inventory is approximately 10.2 million square feet over four submarkets: Dartmouth (79%), Halifax Industrial (14%), Bedford Industrial (6%), and Sackville (1%).  Marginal decreases in the availability rate demonstrates continued strength in the city’s industrial market.  Q4-2009 availability was 4.9%, dropping 30 bps since the end of Q3-2009, making it the lowest availability rate the market has seen since Q3-2008.

2009 Rental rates have remained flat with average industrial net asking rates at $7.12 PSF at the end of 2009, up from $7.11 PSF from third quarter numbers.  Net rental rates are expected to continue to slowly increase over the next few quarters.  A total of 268,800 SF of new industrial supply was added to Halifax’s industrial market over the past year, representing a 2.7% growth in inventory.  There is currently no multi-tenant industrial construction underway, and availability is expected to stay well below 6.0% in 2010, making Halifax industrial one of the more stable asset classes in the country.

Houston

Being the 4th most populous city in the United States, Houston has a population of approximately 5.88 million.  The city is an Oil and Gas hub in North America, home to 29 Fortune 500 Companies, and nearly 50% of the Fortune 1000 Companies located in Texas.  Unemployment at the end of Q4-2009 was recorded at 8.2%, lower than the US national average of 9.4%.

Houston – Office

Oil and gas services firms and major oil companies significantly cut capital spending and began re-sizing their organizations in 2009.  Houston’s office market, being an oil and gas nucleus, deteriorated over the past 12 months.  Office inventory is over 190 million square feet, 42 million square feet of which is in the Central Business District (CBD) and 148 million square feet located in the suburbs.

Overall vacancy increased to 15.9% in Q4-2009; CBD vacancy was 9.8% and suburban vacancy was 17.6%.  Gross asking rates held flat across the city at $24.00 PSF at the end of 2009 due to the fact that landlords were willing to hold face rates while offering attractive tenant inducement packages.  Average gross rent in the CBD was recorded at $30.27 PSF and $22.96 PSF in the suburbs.  Houston’s overall Class A, B, and C gross asking rates were $31.29 PSF, $21.32 PSF and $15.55 PSF respectively.

Over 5.54 million square feet of new supply was added to the city’s office inventory in 2009.  2.40 million square feet of office construction remains underway going into 2010.  Most notable projects are BP’s Helios Plaza (387,000 SF), Hess Tower (944,000 SF) and Main Place (972,000 SF).  Majority of projects under construction are fully pre-leased, with the exception of Main Place. Overall vacancy is forecasted to reach 19.0% by the end of 2010.

Houston – Industrial

Houston’s industrial market is noticeably more stable than its office sector.  Seven submarkets make up the city’s industrial inventory of over 400 million square feet: CBD (13%), North Industrial (14%), Northeast (7%), Northwest (28%), Southeast (17%), South (9%), and Southwest (12%).  Overall industrial vacancy at the end of 2009 was 6.8%.  The North submarket posted the greatest vacancy in Q4-2009 at 8.8% as it added 11 new buildings to inventory during the past year.

Asking and effective rates have slightly decreased over the course of 2009 due to lower demand, a struggling US economy and a competitive business climate among landlords.  Overall gross asking rates across all industrial product types remained flat at $5.75 PSF at the end of 2009.  Effective rates, on the other hand, are significantly lower than 2008 due to the fact that landlords are offering free rent, reduced rental rates and more attractive improvement allowances in an effort to preserve existing tenants as well as to attract new ones.  Landlords have become receptive to renegotiating current lease terms in exchange for long- term occupancy.  Overall average gross lease rates for Warehouse/Distribution space is $4.44 PSF; Flex/Service is $7.20 PSF; and $5.52 PSF for Manufacturing.

5.6 million square feet of new inventory was added to Houston’s industrial market in 2009.  1.3 million square feet of projects were under construction to start 2010, 76% of which are in the Southwest submarket, 12% in the North, 2% in the Northeast and 10% in the Southwest.  The past year has seen a reduction in development activity which is expected to continue to diminish in 2010.  With new construction at a standstill, it is expected that Houston’s industrial market will remain stable through 2010.