EDMONTON

At the end of the second quarter, the number of commercial building and land sales was down eight per cent year-over-year and the value of those sales was down five per cent, marking the second consecutive year that sales value totaled less than $1 billion at mid-year.

Land sales declined by 40 per cent year-over-year, indicative of a slowing economy, but the total dollar value of building sales was up 13 per cent compared with the first half of 2015. Property values have remained fairly stable, with the exception of industrial property related to oilfield companies, which has seen a decline. Capitalization rates are trending modestly upward in most asset cases.

Private investors are the most active buyer segment in Edmonton’s commercial property market, while institutional investors have been more conservative since the downturn in the Alberta economy. Demand from investors for top tier assets in all sectors remained high in the first half of the year. These include multi-family apartment, well-positioned retail, and industrial with well-capitalized tenants.

Despite the economic downturn, vacancy rates in Edmonton were fairly healthy at mid-year. The vacancy rate for industrial property was at six per cent, multi-family was at five per cent and retail was at 3.5 per cent. For office space, the vacancy rate is higher, at approximately 12 per cent. This is expected to increase as 1.8 million square feet of new inventory come onto the market beginning in 2017.

Increased vacancy typically results in a decrease in land sales as development slows down; however, there are assets available in the market that are attracting buyers who feel it is the time to increase their asset positions as world oil prices slowly recover. Alternatively, some commercial sellers are looking to dispose of assets, seeing the increase in vacancy and potentially a decrease in rental rates as a threat to their asset value.

Until the WTI benchmark price of oil stabilizes at or above $50 per barrel, Edmonton’s commercial property market is expected to remain in a down cycle. A new provincial carbon tax comes into effect in January 2017, which is expected to further curtail capital investment and have a negative impact on the provincial economy.

On a more positive note, significant downtown development continues to boost employment and optimism. The $2 billion ICE District, featuring a new arena as well as office towers, hotels, entertainment venues and a museum, is revitalizing the city’s downtown. The Anthony Henday Ring Road, scheduled to be completed this fall, is expected to unlock further development opportunities in Edmonton’s northeast.

[Recently], world oil prices have fallen below $30.00 per barrel and
are at prices not seen since 2003. The world oil price situation continues to cast an economic pall
over the province as well as the City of Edmonton. Edmonton outperformed much of the province
during the year however, most fore-casters are indicating limited growth for 2016. There are no
apparent signs of short term recovery in oil prices. As such, The Network is forecasting another
weak year for 2016. The momentum of a strong economy of 2014 carried over for the first half of
2015 and this propped up sales to a high degree. There was a more dramatic drop off in activity in
the second half of the year. On this basis, The Network is forecasting that 2016 will be a weaker
year as compared to 2015 and is likely to be on par with 2009, which was the low point in the
2008/2010 economic downturn. Once again, recovery in the market will remain contingent upon a
recovery in world oil prices.
In 2016, The Network is launching a listing database which is available for members on a monthly
subscription basis. The listing database covers all multi-family, commercial and industrial offerings
of land and buildings within the Edmonton Metro Area. This includes listing data from all major
brokerage firms, as well as investment real estate offered through the MLS® System of the
REALTORS® Association of Edmonton, etc. The Network as of the date of the writing of this report is
tracking over 300 listings.

Source: https://images.magnetmail.net/images/clients/EREB/attach/2015yearendreview.pdf

EDMONTON

In the first half of 2015, the commercial property market in Edmonton felt the impact of the drop in oil prices. The number of commercial building and land sales was down 9 per cent and the overall value of those sales was down 13 per cent year-over-year. For the first time in three years, total sales at mid-year dipped below $1 billion.

The most significant decline was in land sales; sales decreased by 30 per cent year-over-year, indicative of a slowing economy. A bright spot was multi-family residential – sales increased by 45 per cent year-over-year, driven by continued low vacancy and high rental rates in the city. Overall, sales in the third quarter are pointing toward continued slower activity through to the end of the year.

There is a good representation of Real Estate Investment Trusts (REITs) and pension funds; however, the regional/local private companies are currently driving demand in Edmonton’s commercial property market. The industrial market has slowed, due to downsizing in the oil service sector driven by decline in oil prices. There is increasing demand from foreign buyers for good quality assets. U.S. investors in particular are taking advantage of the opportunities afforded by the lower Canadian dollar.

Top tier assets in all sectors continue to be in high demand. Multi-family residential, well-positioned retail and industrial properties with well-capitalized tenants are the most in-demand property types. There is a shortage of good-quality products in these categories and they are quick to sell when they come on the market.

Vacancy rates in the city were healthy at mid-year; the vacancy rate in industrial was at 5 per cent, and retain and multi-family at 2.5 per cent. Office vacancy rates are at 8.5 per cent and expected to rise in the coming year as new supply comes on the market. 1.2 million square feet of new office inventory, plus over 3.0 million square feet of new industrial supply and sublease space are anticipated to come on the market by the end of 2016. With oil companies downsizing to reduce costs, owners may be competing to attract and retain office and industrial tenants, which could cause hesitation among investors in these segments. Conversely, opportunities may arise for assets that will need to be repositioned.

Recent developments that may slow down Edmonton’s commercial property market in the coming year include the NDP goverment’s provincial oil and gas royalty review, further capital spending cutback announcements by the oil producers, increases in provincial personal and corporate taxes and the minimum wage increase to $15 per hour. In June 2015, Alberta’s provincial government forecast in its first quarter fiscal update a disconcerting $5.9 to $6.5 billion annual deficit for the year ending March 31, 2016.

Despite economic slowdown due to the downturn in the oil industry, ongoing development projects are boosting the city’s outlook. In downtown Edmonton, the 25-acre, $2 billion Ice District development features a new arena, public plaza, office and condo towers, entertainment venues, hotels and retail. A new provincial museum, new LRT station and expansions to the campuses of MacEwan University and NorQuest College are in progress as well. The completion of the Anthony Henday ring road, scheduled for 2016, is expected to unlock suburban development opportunities in northeast Edmonton.

Until oil rebounds, Edmonton is expected to remain in a down cycle. However, significant ongoing development in the city is prompting optimism, and with an experienced commercial group of owners, the market is expected to adjust and move forward.
 

Source: EREB

The REALTORS® Association of Edmonton Commercial Division released the semi-annual update on commercial real estate activity within the City of Edmonton. The report includes a synopsis of commercial and industrial activity for the period ending June 30, 2015 as recorded in Land Titles records when the title to the property is transferred to the buyer.

The total number of sales (284) of commercial and industrial land and buildings in Edmonton for the first half of 2015 is down 9.27% when compared to the same period last year. For the first time in three years, the value of those sales has dipped below one billion dollars at mid-year. The 2015 total value was $911 million, 13.43% lower than mid-year 2014.

“With the drop in oil prices throughout the end of 2014 and beginning of 2015, we anticipated that commercial growth within the City of Edmonton would cool down.” said Michael Thompson, President and CEO of the REALTORS® Association of Edmonton. “While sales dropped in most areas, we continue to see growth in multi-family buildings and commercial land, most of which can be attributed to the strength within the suburban markets.”

While multi-family building transactions remained stable at 33, overall sales volumes jumped 45% to $271 million, compared to $187 million and $188 million for mid-year 2014 and 2013 respectively. This surge in commercial multi-family sales comes while housing starts in the market remained very strong during the first half of 2015 and single family residential values held steady.

At $131 million, the value of urban development land sales dropped 47.3% compared to the same time last year. The total value of all land sub-sectors (industrial, commercial, multi-family, urban development and institutional) was $310 million, down more than $134 million compared to mid-year 2014. The only subsectors to see an increase in values compared to mid-year 2014 were commercial condos, commercial land, and multi-family buildings, which combined recorded sales of $361 million, an increase of 43.5%.

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Edmonton

A sustained period of exceptionally low vacancy rates across the Edmonton commercial market has created a hospitable environment for real estate investment.

There is a high level of confidence in the commercial marketplace, given the availability of capital available to buyers in this market.

A higher-than-average growth rate of the Albertan economy has contributed to the current market, where real GDP is expected to grow 3.6 per cent in 2014, significantly exceeding the national average of 2.7 per cent. The Bank of Canada’s decision to keep interest rates low has also been a factor.

Edmonton’s downtown activity is the major contributing factor for 2014, and the arena development has been a catalyst for brand new residential and office inventory.

Between January and June of 2014, Greater Edmonton’s industrial vacancy continued to decrease, while competition for available space increased. As a result of the limited new inventory, Edmonton’s vacancy rate dropped below 3.0 per cent, finishing the second quarter at 2.84 per cent.

In May 2014, total commercial building permits in the city reached $83 million: An impressive total after nearly three years of solid growth in the economy and burgeoning competition in other districts. Nearby, in “Alberta’s Industrial Heartland,” over $27 billion in primary industrial and energy projects are underway, excluding projects that are still finalizing costs.

There is also an influx of people with a net migration upwards of 12,000 into Edmonton from other provinces. This has increased the demand for housing, rentals, and other services, causing the demand to spill over into the commercial marketplace.

There is currently a shortage of industrial buildings under 10,000 square feet with smaller acres (under 5) for both sale and lease. Demand for multi-family land within the city remains high, as does retail investment product in the $1 million to $3 million range.

There is a high level of confidence in the commercial marketplace, given the availability of capital available to buyers in this market.

Edmonton’s rising income per capita, coupled with its significant gains in employment and relatively low tax levels, has made it a desirable destination for many inter-provincial and international migrants.

In 2013, the Conference Board of Canada estimated that net migration to Edmonton was approximately 35,354. 12,222 net migrants are still expected to move to the city in 2014, further expanding the tenant pool and bolstering demand for rental housing.

The construction of apartment buildings had picked up significantly by the start of 2014 with 2,537 more apartment units still under construction. The new supply has generated an upward pressure on vacancy rates as the city observed a 58 basis point increase throughout HI 2014. Edmonton’s vacancy rate is estimated to be 1.8 per cent. As new units are introduced and peak migration returns to its regular levels, vacancy rates are expected to rise moderately in 2015.

New development in Edmonton will continue to lag until early 2015, as tenants compete for the small pool of useable, available buildings. While several major projects that will alter Edmonton’s industrial inventory have been announced, Edmonton will remain a very steady market until that product is introduced.

A growth trend will dominate the downtown office market over the next 15 years, as up to 39 different projects are set to inject over $6 billion into the core. The possibility of up to 60,000 new residents in Blatchford and East Downtown indicates an exceptionally positive outlook for the long-term.

The Edmonton market is seeing a significant demand for purchase of commercial condominium units in the 1,500- to 3,000-square-feet range by owner users and professionals. There is a growing appetite for ownership rather than leasing, given the low interest lending environment.

While tighter lending criteria often has an impact on the commercial market, the opposite is true for Edmonton. There is a high level of confidence in the commercial marketplace, given the availability of capital available to buyers in this market. In some cases, lenders will fund upwards of 80 per cent on solid owner-user or fully-leased product. This market is seeing 80 per cent financing in some construction projects as well.

Following the Bank of Canada’s December 2013 announcement to keep the overnight rate at 1.0 per cent, the cost of debt will remain low for the first six months of the year, likely continuing well into 2015. Only incremental rate hikes are expected thereafter, as the central bank will likely be unwilling to introduce unhealthy shocks to the economy. Edmonton will see cap rates reduced in various sectors, but will also continue to see double-digit office vacancy in both the downtown and the suburban markets for quite some time.

There is heavy investor confidence in the marketplace, but there are also calls for cautious optimism, particularly as it relates to the activity in downtown Edmonton. There is a sudden desire for everybody to be downtown, which is good news for the re-vitalization of the core. Even still, it is advised that a thorough analysis of risk be conducted as one embarks into this red hot cauldron of activity.

Source: Edmonton Real Estate Board
RE/MAX Commercial Investor Report 2014

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