"Spec market has disappeared"

Few developers gambling on commercial real estate market in either Saskatoon or Regina after 10 years of giddy growth

By
Western Investor
March 22, 2016





Regina is facing higher office vacancy rates after 10 years of rapid development
Speculation has vanished in Regina as office vacancy increases

 

There is no silver bullet for what ails the commercial real estate markets in Saskatoon and Regina.

The slowing economy and falling commodity prices are teaming up to put a damper on confidence in the province, leading to less-than ideal vacancy and absorption rates.

“It’s a disjointed market right now,” said Mitch Molnar, president of Regina-based Mitchell Developments Ltd. “The tenants aren’t beating down the door. There is the possibility of some rental erosion. 

The primary differences between Saskatchewan’s two largest cities is Saskatoon has a much heavier weighting towards industrial space while Regina, a government town, has a larger quotient on the office side.

In fact, Saskatoon’s industrial market has grown by 500,000 to 700,000 square feet annually for the last decade, said Tom McClocklin, president and managing director for Colliers International.

“It took 100 years to get to 17 million (square feet) then it grew by 50 per cent in the last 10 years,” he said.

Molnar says while the economy was flying high, hundreds of thousands of square feet of warehousing space was built on spec in Saskatoon, industrial vacancy rates were low, rents were holding up and tenants were signing on at some of the highest rates in the country.

“That story has changed over the last 12 months,” he says. “There are still some guys building but the marketplace is struggling to fill the vacancies now. I think landlords are starting to offer tenants some reduced rates, incentives and tenant improvements.”

Regina, meanwhile, didn’t have the same kind of overbuilding but available industrial land was snapped up developers. The only parcels being built out today are by user-owners.

“The spec market has disappeared,” he said.

Mitchell Developments has a portfolio of 750,000 square feet of space, primarily in the industrial and office markets, in both Saskatoon and Regina.

The vacancy rate in Saskatoon’s industrial market increased by two per cent in 2015 thanks to the abandonment of four larger buildings but leasing activity was relatively brisk with smaller properties, said Alvaro Campos, Saskatoon-based brokerage business manager for ICR Commercial Real Estate.

“What you have to keep in mind with a fluctuating economy is there will be ups and downs and some users will be forced to shed space,” he said.

“There is more optimism in Regina as there is demand for new inventory. If there’s an opportunity to build more, you’ll see more users enter the market.”

Saskatoon has seen negative absorption on the industrial side but Campos believes the market is starting to right itself.

Regina’s office and retail markets are following a very similar path, he said. Both had low vacancy rates as recently as 2012 but they’ve jumped up into the mid-teens with negative absorption since then.

Molnar, whose company specializes in revamping and renovating primarily office and warehousing space and then finding new tenants for it, said he’s been in the business long enough to know he just has to ride out of bottom of the cycle.

“Those of us with portfolios are busy managing them. We’re looking for transactions but they’re hard to find, never mind being successful and completing them,” he said.


Frank O'Brien is the editor of Western Canada's biggest commercial real estate newspaper, Western Investor, as well as a contributing editor at West Coast Condominium, real estate contributor to Business in Vancouver and a regular media commentator on real estate investment.
Copyright © Western Investor

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