Edmonton’s commercial real estate. Same sector. Different dynamics, issues and factors. Different trends. Different results. Downtown office vacancy rates remain high, while the city’s industrial market is red hot with low vacancies, according to recent CBRE’s quarterly report. As with many other Edmonton-based businesses, analysts and insiders suggest that – while the two COVID years took their toll in many aspects of Edmonton business – in mid-2022 and planning for 2023, putting too much blame on COVID is getting lame and stale. As benchmarks, maybe, but not excuses.
In Edmonton, as in most of Canada’s major commercial markets like Toronto, Montreal, Ottawa, Calgary and Vancouver, the commercial real estate’s industrial sector has been very active.
A comparison of Edmonton stats with national averages tells the story:
- Edmonton – office space: vacancy 21.3%, absorption 91,104SF
- National – office space: vacancy 16.3%, absorption 189,242SF
- Edmonton – industrial space: vacancy 3.9%, absorption 1,871,192SF
- National – industrial space: vacancy 4.6%, absorption 863,902SF
“Last year, Edmonton’s industrial market finished the year with 2.1 million square feet of positive net absorption, the highest quarterly level since the third quarter of 2013,” notes David Young, Executive Vice President and Managing Director of CBRE Edmonton. “The overall availability rate dropped 1.4 per cent in fourth quarter of 2021 to 7.0 per cent, mainly due to significant leasing activity in the northwest submarket. As newer warehouses continue to be built and brought into the market, tenants in older buildings are expected to shift to the newer buildings. Class B vacancies are expected to increase. Rates are expected to increase with rising construction costs for the newer builds.
“Limited industrial product for larger users will continue to put upward pressure on rental rates. It’s a fact! Edmonton’s office rents have remained flat but industrial rents have increased,” he notes.
“We expect that this will continue into the near future. There is a flight to quality and it shows in the AA vacancy being considerably lower than the overall market. B buildings must compete on rates. Rising construction costs have started to push industrial rental rates and this will continue. Limited vacancy and availability will make renewal probabilities higher with continued rental rate growth.”
Young explains that the Edmonton office market is starting to see return-to-office plans unfold and tenants are still trying to get a feel for what the office will look like, in terms of the new normal of how much space and how the space is best and most efficiently configured.
“Our challenge in the industrial market is just pure supply. There’s not a lot,” he says. “Our industrial market is doing well due to the fact the region is witnessing continued investment. The hydrogen initiative along with investment in carbon capture technology is bringing global investors to our city.” Young points out the example of that shortage of land in the GVR market is also pushing tenants to the Alberta market. He expects the trends to continue.
Edmonton development is also on the rise, with a seven-year high of 4.6 million square feet of space under construction. Major projects include Panattoni’s 545,000-square-foot building in the northwest, the Monarch and Discovery Business Parks in Nisku-Leduc, and the 2.9 million-square-foot Amazon fulfillment centre in Highlands Business Park.
“Although it will not be official and open until 2025, the Canadian Western Bank will have a new tower in ICE District and be the anchor tenant, occupying 200,000 square feet. When the building is ready, they will vacate approximately 150,000 square feet from the current Canadian Western Bank Place.”
Richard Darling, Managing Director of Colliers’ Edmonton office, also suggests definite trends, at least for Edmonton industrial space. “There is very much a spill-over-effect due to an increase in demand from other major markets with higher costs, tighter markets and lower vacancy. Edmonton rental rates are increasing as the supply of available properties decrease and demand keeps growing. He highlights some examples of Edmonton’s hot industrial market and notes that Edmonton currently has 4,729,413 (4.7 million) SF of industrial space under construction. “Like the 2.91 million SF in the new five-storey Amazon building in Acheson; more construction projects are continuously being announced due to the high demand for industrial warehousing and distribution space,” he says.
Edmonton’s industrial market is doing better than the downtown office market. Richard Darling emphasizes that “low vacancies and high demand are signaling to developers that more supply is needed. When it comes to industrial space, there is 762,194 SF of new supply expected in the next six months. There’s a significant demand for shop space due to rising WTI crude oil prices. Low downtown office occupancy results in a negative outlook by tenants on the office market and leads to an expectation of lower rental rates or higher incentives.”
Reduced activity in small to mid-size users and taking longer to test out new return-to-work options and strategies has maintained lower than normal activity levels in the core.
“The Alberta Government transitioned back-to-office in April,” he says. “It paved the way for businesses to start making decisions regarding their own office space. Edmonton landlords are aware that tenants are beginning to make longer-term decisions with the removal of mandatory WFH (work-from-home) trends.”
Darling predicts that, over the next few months, there will likely be a decrease in subleases on the market as businesses transition back to the office.
“Landlords could potentially implement creative rent structures for third party users who provide retail/services to tenants in their building. An increase in the number of Edmonton residents downtown, such as new multi-family developments, will help increase the number of people who want to work near where they live.”
With much Edmonton expertise, Darling emphasizes that adding and improving office building amenities – like fitness, social lounges, other creative spaces – to provide a similar work/life balance to WFH may be in-demand features. “Those along with other possibilities of employee wants and must-haves. Quirky or not, features like a decrease in monthly downtown parking rates. After not paying $200 – $300 monthly for two years, parking costs could be reduced to reflect demand, since these haven’t come down since the onset of the pandemic and have been a bit of a deterrent for staff retuning to the office. Also consider health, safety and wellness components in buildings, like good air circulation and light penetration. No doubt about it. It’s a chicken and egg situation in which the more people that come downtown, the more vibrant downtown becomes, and the more people are enticed to return.”
Young underscores that, compounded with the economy, the new normals of the workplace and new hybrid WFH routines, Edmonton landlords are now dealing with tricky and competitive rates. “I think a lot of big tenants are getting back into the office right now as it relates to trying to build culture, trying to coordinate training, etc. It’s kind of hard to do some of those things when you’re not with your team.”
He concludes, “For the balance of the year, and likely the first half of 2023, the winner will continue to be the industrial sector given our location in Western Canada, our access to roadways, railways, and population. I’m looking for big things in the industrial market this year.”