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| Population 1.1 million | ||||
| Employment 702,000 | ||||
| Unemployment Rate 3.4% | ||||
| Retail Sales $22.2 billion | ||||
| Consumer Price Index 3.7% | ||||
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| ↑ | Office | ↓ | ||
| ↑ | Industrial | ↓ | ||
| ←→ | Retail | ←→ | ||
| Overall Cap Rates ←→ |
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| Source: DTZ Barnicke | ||||
| 2007 | 2008e | 2009f | 2010f | |
|---|---|---|---|---|
| Real GDP* | 3.8% | 1.7% | 2.4% | 3.5% |
| Population* | 3.5% | 2.8% | 2.0% | 1.9% |
| Employment* | 3.9% | 3.1% | 0.8% | 1.6% |
| Unemployment Rate | 3.2% | 3.4% | 3.6% | 3.6% |
| Personal Income per Capita | $52,201 | $54,267 | $55,595 | $57,150 |
| Total Housing Starts | 13,500 | 12,300 | 8,700 | 8,800 |
| Retail Sales* | 7.0% | 1.5% | 4.5% | 6.0% |
| CPI* | 5.0% | 3.7% | 2.6% | 1.9% |
| Source: Conference Board Canada | *Percentage Change from Previous Year | |||
Market overview
Calgary’s reign as one of the nation’s top growth leaders ended in 2008 as the economy expanded by a mere 1.7%, a far cry from the growth rates experienced over the past few years. This decline in economic activity was due primarily to a reduction in mining output and negative growth in the local manufacturing and construction sectors. Calgary is forecast to rebound and take the lead once again, although economic expansion will be at more sustainable levels.
In 2009, a large part of growth in Calgary will come from the wholesale and retail trade sector. Unfortunately, the services sector in Calgary that supports Alberta’s energy industry, and is largely responsible for Calgary’s past booming growth, will be another victim of crude oil prices which have declined over $100 per barrel from the high-water mark reached in July 2008. Nexen, Canadian Natural Resources, Suncor, Petro-Canada, and EnCana Corp have already announced budget cuts, which will undoubtedly affect Calgary’s services sector growth in 2009. Overall activity in Calgary in 2009 weighs heavily on investment in energy in Alberta and the impact the weakened dollar and receding global economy will have on drilling and exploration activity.
Nexen, Canadian Natural Resources, Suncor, Petro-Canada, and EnCana Corp have already announced budget cuts, which will undoubtedly affect Calgary’s services sector growth in 2009.
Office
Overall office vacancy reached 5.5% at the end of 2008, up 250 basis points from 2007 levels while Downtown Core Class A vacancy came in at 2.2%. The increase was largely due to the addition of almost 3 million square feet of new supply to the market. Although the overall vacancy rate nearly doubled from the end of 2007, the growth in occupied space was approximately two million square feet as much of the space coming on stream had been pre-leased.
Over 8.0 million square feet of new office space is set for completion between 2009 and 2011. Pre-leasing levels of 60% have helped alleviate pent-up demand in an otherwise tight market. Energy, large scale engineering and support services to the energy sector drive demand for office space in Calgary. With the recent pullback in energy prices many energy companies have already, or will soon be, scaling back their plans and capital budgets for 2009 which will impact the overall demand for office space in the Calgary market for 2009 and beyond. As such, we expect vacancy to trend higher in 2009 as demand softens and new inventory comes on stream. How quickly the market is able to absorb the new supply and backfill space will determine the overall health and future pricing of the Calgary office market.
Tight credit markets have already had a significant impact on a number of projects in the proposed stage, or infancy of construction, that have not secured all of the necessary construction financing. Fortunately, most of the significant development is well underway and likely to be completed on schedule.
While tenants continued to face some sticker shock in 2008, rental rates have stabilized as a result of increased competition in the marketplace as vacancy increases. Rental rates are expected to experience downward pressure in 2009 as more supply comes on stream. Landlords will also face competition from the growing number of sublease offerings in the market.
Industrial
Industrial vacancy increased 120 basis points to 3.2% in 2008. Although absorption for 2008 was 2.3 million square feet, vacancy increased as a result of the volume of new supply that came on stream throughout the year. After a weak year in various types of energy related and leisure market manufacturing, due to declining demand from the US and a strengthened dollar, it is forecast that industrial vacancy in Calgary will increase further in 2009 to 4.6% and absorption will slow to 1.0 million square feet. However, Calgary remains a favoured location for logistics firms seeking to distribute product throughout Western Canada and Calgary will continue to benefit from population growth.
Although overall demand for industrial space is declining, demand for superior, more efficient space exists. To meet this demand there are several large developments in the pipeline from Sunlife, Trammell Crow, Hopewell, WAM, and ING. However, with on-going labour shortages and a global economic slowdown, builders of speculative industrial developments have been quick to react by pushing back delivery timelines or temporarily shelving development plans until the market improves.
In 2009, the rise in vacancy and the stabilization of construction costs will put some downward pressure on rental rates for older properties. Newer properties, with lower operating costs, higher clear heights, located near transportation arteries and offering overall improved efficiency will likely sustain 2008 rates through 2009. Much of the demand is moving to the north of Calgary, at or near the Airport, which continues its expansion as one of North America’s hubs.
| Office Inventory | 52.1 million |
| Office Vacancy | 5.5% |
| CBD Class A Vacancy | 2.2% |
| Industrial Inventory | 108.8 million |
| Industrial Vacancy | 3.2% |
| Source: DTZ Barnicke and Conference Board Canada | |
Investment
The Calgary investment market in early 2008 was as buoyant as it had been throughout 2007. As the year progressed and oil prices declined further, added caution became the buyer's new standard for Calgary. With vacancy rates moving upward and some sublet space entering the market, the demand for Class B and C office buildings declined as did the demand for smaller strip malls and community shopping centres. Cap rates have moved upward by 100 to 175 basis points, but even with the subsequent movement in pricing the pace of the market has been dramatically slower.
First class office buildings remain the product category of choice for international buyers and domestic funds; however, most owners being national in scope and well funded have not been motivated to sell. Most experts feel that the readjustment in oil prices are a painful but temporary slide and once some stability and understanding of global financial markets and the US market conditions become less cloudy, oil prices will begin to slowly trend upwards. When this happens, the focus and spotlight will remain on the downtown Calgary towers now in inventory or soon to be added, all of which are A to AA quality and partially or substantially leased.
Retail
A number of new retailers from the US are targeting Calgary for new locations and there is continued interest to find new locations. Suburban Calgary continues its growth to the north, west and south of the city as new developments continue to open outwards to the new Calgary ring road. One of the most anticipated developments to take advantage of the improved accessibility brought by the ring road is Ivanhoe Cambridge’s Cross Iron Mills “mega-hybrid” shopping centre. The 1.5 million square foot development is scheduled for a 2009 completion and will include 16 anchor tenants, 180 specialty shops, and will be attached to a new Casino, racetrack, and entertainment complex.