MARKET OVERVIEW

The first half of 2008 looked to be on par with the moderate growth levels experienced in 2007; however, the markets began to retract in the second half of the year, mainly as a result of a sharp slide in crude oil prices and a significant slowdown in net migration, job growth and housing starts. Consequently, GDP growth retracted 190 basis points from 2007 levels to 1.8%. The economy is forecast to rebound slightly in 2009 to 2.4%; however, the downside risk to this forecast is the price of oil remaining at lower than anticipated levels.

The expected rebound in 2009 can also be contributed to projects such as the South LRT extension, the $600 million mixed use Century Park, and the $250 million EPCOR office tower. In addition, growth in the services sector and greater growth in net migration will boost Edmonton’s expansion in 2009.

While the city directs funds to expand the financial, education, and medical sectors of the domestic economy, oil and natural gas continue to be the primary drivers of the city’s growth. Approximately $72 billion of energy related projects are currently active and over $100 billion is planned for the future of Alberta, much of which will take place in Edmonton and the surrounding area. However, with oil softening significantly from peak pricing early in the year, expect a short term retraction in investment in energy until crude oil prices return to higher levels.

Office
Overall office vacancy reached 4.0% at the end of 2008, down 75 basis points from 2007 levels. The decline in vacancy is understated due to the seven new buildings that added 268,000 square feet to Edmonton’s office inventory in 2008. Both the downtown and suburban markets experienced significant growth, with the government and utility sectors expanding in Downtown and the construction and engineering firms expanding in the suburban markets.

With very few large contiguous blocks of space available, and more firms anticipating long term expansion, construction activity in Edmonton will be very strong moving forward, particularly in the suburbs. Despite the impacts of declining oil prices and ongoing labour shortages, the overall outlook is optimistic with 16 new buildings expected to be completed in 2009, which will add approximately 960,000 million square feet of inventory to the market. One of the most anticipated buildings is 10830 Jasper Avenue, historically known at the Professional Building, which will deliver 210,000 square feet of office space and is anticipated to achieve LEED Gold.

The overall vacancy rate is expected to rise slightly in 2009 with the large amount of new inventory coming to market. In turn, expect rental rates in the downtown and suburban regions to remain stable for the first half of 2009 and begin to experience some downward pressure in the second half the year.

Industrial
The industrial market continued to perform extremely well in 2008 with approximately 1.1 million square feet of absorption. Twelve completions in 2008 added 1.3 million square feet to the market, resulting in a vacancy rate of 1.4%, a 28 basis points increase from 2007 levels.

Expect vacancy to rise to the 1.7% range in 2009, attributed to the tremendous amount of new supply anticipated to be delivered during the year. Roughly 11 buildings totaling 2.0 million square feet is anticipated, led by developments from GWL, GPM, Hopewell, and Bentall. Demand for this new space will continue to be driven by distribution and oil and gas uses. However, the fastest growing area of demand is for yard storage space. Tenant demand will continue to be greatest in the 5,000 to 10,000 square foot range.

Although the vacancy rate is trending upwards, the industrial market is still very much a landlord’s market. Expect rental rates in 2009 to remain stable; however, in the second half of 2009 some landlords, in light of the growing competition, may begin to offer more free rent and incentives to attract tenants while maintaining existing net rental rates.

Investment
2008 started fairly strong; however, the investment climate deteriorated towards the end of the year as economic weakness and liquidity issues became more prevalent. Sales slowed due to a lack of product as well as a lack of financing. The Edmonton market remains bullish on strong local fundamentals, however, investors affected by liquidity issues and stock market losses are assuming a more defensive investment strategy. Consequently, sales activity in 2008 was down more than 50% compared to 2007.

Moving forward to 2009, sales activity is expected to rise slightly as motivated vendors sell their properties at reduced prices. Overall cap rates are forecast to rise to between 6.5% and 7.5% for high quality product, and as high as 8% to 9% for product of lower quality. Industrial and office product had the strongest demand in 2008 and will continue to be the most sought after product in 2009. The multi-unit residential sector will have to undergo re-pricing in 2009 to attract buyers, as demand has declined significantly due to oversupply and overpricing in the market. Expect to see a number of foreclosures in 2009.


Retail
Retail sales growth declined 640 basis points from 2007 and a staggering 1,300 basis points from 2006 levels, coming in at 0.9% for 2008. In 2009, this trend is expected to reverse as population growth trends upward and demand for services increase. Retail sales are expected to record a 4.2% gain in 2009.

Despite the decline in retail sales, retail development in 2008 remained very healthy, both in the suburbs and downtown. In the suburbs, shopping centres anchored by grocers such as Sobey’s and Save-on-Foods gained traction. In addition, the expansion of Southgate Centre shopping mall will bring an additional 129,000 square feet of space for lease in 2009. The face of downtown shopping is changing, drawing consumers to the downtown core and national retailers to street front locations.

Tenants were challenged by record high rental rates in 2008. However, it is expected that 2009 will bring stabilized rental rates as more retail space comes on stream.