A record volume of industrial construction is underway in Calgary as developers work to keep up with feverish demand for space from both local and national user groups.
Construction topped 5 million square feet in the second quarter, well above the 4.4 million square feet seen in 2021. A further 4.9 million square feet is in the planning stages as vacancies continue to drop, creating limited options for tenants looking to relocate or expand.
Vacancies fell to 1.6 per cent in the second quarter, JLL reported, well below the 5 per cent rate Marshall Toner, executive vice-president and national lead on industrial with the brokerage considers healthy.
“We still need more product,” he said.
New product is creating opportunities for larger regional and national players while leaving older space for cost-sensitive smaller, local users who are vulnerable both to rising lease rates as well as higher financing costs on owned space, whether that’s strata-titled units or freestanding industrial buildings.
“A smaller operation, the changes in interest rates greatly affect whether he can purchase something or not,” Toner said.
The majority of new construction in the market is taking place in Balzac, north of Calgary, where property taxes are more favourable than in the city proper.
One of the most active strata developers in the region is Beedie, which is also in discussions for a build-to-suit project that would be its first in the area.
Beedie typically keeps the door open to pivoting strata projects to purpose-built industrial projects if a single user comes forward with a large enough need, but Jorden Dawson, vice-president, industrial in Alberta for Beedie, doesn’t see that happening on its existing strata project in Balzac, Five66. Deals have gone firm on half the project’s 12 units, which begin at $240 a square foot – a fraction of the cost for similar space in Metro Vancouver.
“The ownership opportunity is really attractive to small-medium business owners,” Dawson said, noting that many are looking to hedge against the sharp rise in interest rates seen in recent years. “They’re looking at ownership as an avenue to build equity as well as having a bit more control over their cash flow moving forward. … It insulates them from those future rent spikes that may happen.”
It’s not just independent owner-users that see an opportunity.
In its second-quarter report on the Calgary market, Avison Young noted that quarterly investment in industrial properties rose in Q2, with the largest acquisitions coming from pension funds. While developers held off land purchases, signalling a slowdown in appetite, the potential squeeze this heralds on future supply promises to support ongoing rental rate growth
“The underlying rental rates of this product that’s being built has run room and the market is accepting of these rental rate increases that will support development,” said Tyler Wellwood, a principal with Avison Young in Calgary focused on industrial sales and leasing.
Wellwood doesn’t see the current headwinds posing a long-term threat to the market.
“There appears to be a sustained level of demand, coupled with continued optimism in the city,” Avison Young reported. “Outside pressures aside, industrial continues to be a preferred asset category among all investor types and Calgary is situated as a preferred destination for future growth.”