Calgary's industrial market on the road to recovery
Vacancies decline for second straight quarter
By Mario Toneguzzi
Calgary Herald July 14, 2010
The industrial real estate market is showing signs of recovery as the vacancy rate continues to drop and developers are expected to start on new projects as early as the end of this year.
Vacancies decreased for a second consecutive quarter in Calgary's industrial market as more properties were occupied and the slow pace of new construction continued.
A report by Colliers International in Calgary said the vacancy rate dropped to 5.36 per cent from 5.89 per cent in the second quarter of this year.
"This was driven by three large transactions of 50,000 square feet or more," said Joe Binfet, managing director of Colliers International.
"While rental rates are holding firm in the tighter large-bay market, rates are softer in the small-and mid-bay market as there are more options available to tenants."
There has been nearly 1.5 million square feet of positive absorption year-to-date, which has already surpassed the total absorption level from 2009. Absorption is the change in occupied space from one period to the next.
Binfet said developers are still hesitant to start construction on new developments, but he believes this will be short-lived.
"As positive absorption continues to increase and with no new supply coming to the market, rental rates will rise and interest in spec development will return," said Binfet.
The Colliers report said if a developer commenced construction on a new building today, the earliest it would be available for occupancy is the first quarter of 2011.
"There is only 18,720 square feet of construction underway that is available for occupancy. Look for at least one more quarter of decreasing vacancy, positive absorption and a moderate increase in net rental rates before speculative development commences again," the report says.
A report by Inducor Real Estate Solutions said the industrial real estate market has significantly fewer properties available for sale or lease now compared with June 2009.
"Leasing demand in the past year has been less than purchase demand, resulting in lower rental years than previous years," said the report. "From June 2009 to June 2010, net rental rates declined by seven per cent for properties over 50,000 square feet, by 10.3 per cent for those 20,000 to 50,000 square feet and by 9.3 per cent for spaces 5,000 to 20,000 square feet.
"After several years of significant increases, net rental rates have been declining steadily since June 2008. Since then, net rental rates are down by 23 per cent, 20 per cent and 20 per cent in these segments respectively."
Chris Saunders, managing partner of Inducor, said the consecutive quarters of a declining vacancy rate, a slower pace of decreasing rental rates and sale values, and developers preparing for the next cycle are all indicators of a recovering industrial market.
"The declining vacancy rate is the result of very disciplined developers combined with steady-eddy demand that has been the trademark of our industrial market for the last 15 years or so, even through the recession," said Saunders. "It was slower demand, but at least there was always a certain level of activity occurring. This steady demand has been chipping away at a consistent supply level so now vacancy is declining.
"Once we dip down into the low four per cent vacancy range, by the end of this year or early next year, we will see developers in the ground again, positioning for product completion in late 2011 and early 2012, which will bump rates again."
Industrial Real Estate Vacancy Rate
Region April 2010 July 2010
Central 2.73 % 2.68 %
Northeast 5.77 % 5.75 %
Southeast 6.85 % 5.69 %
Total 5.89 % 5.36 %
Source: Colliers International
Photo by: Wormey
