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Commercial real estate’s tumultuous year ahead

You’ve heard about Alberta’s residential real estate woes. Is the commercial market similarly doomed?

Dec 10, 2015

by Robbie Jeffrey


In the December issue of Alberta Venture, I wrote about Alberta’s precarious residential real estate market. It seemed like the perfect storm was brewing: consumer confidence was dropping significantly (in the rest of the country, it barely budged); inventory was rising as prices nosedived and sales slumped; Albertans were borrowing more than ever; and the unemployment rate was creeping upwards.

Since the time of writing we’ve seen more of the same. As the Financial Post reported, monthly rents in both Alberta’s major cities are falling – in Calgary, they’re down 20 per cent since last year, and the number of houses for rent has increased by 64 per cent. Edmonton’s rental prices have fallen by less than half of Calgary’s, but the number of listings jumped 73 per cent. The Canadian Real Estate Association’s October numbers show that average home prices, though they increased in areas such as Lethbridge, South Central Alberta and Medicine Hat, continued to drop in Fort McMurray (by 20 per cent year-over-year) and Calgary (by 4.4 per cent, more than the September figure), among others. Year-over-year active listings increased, as did months of inventory, while both the value and number of total home sales slid.

But what about commercial real estate? CBRE Canada recently released its Commercial Real Estate Market Outlook for 2016, which situates Alberta in a precarious spot compared to the rest of the country. The bottom line? The commercial market won’t be spared from Alberta’s real-estate woes.

Lenders nationwide are actually more willing to increase the availability of debt for commercial properties, but only in super-prime locations like Vancouver, Toronto or Ottawa. The report says investors will become more selective in 2016, “which will further divide a market that is already clearly split between core and secondary assets.” Investment in office space should increase by about 13 per cent from 2015 numbers*, though that will still be far removed from 2014 transactions; industrial investment, on the other hand, will increase by almost the same amount, but will actually surpass 2014 investment.

But that’s for all of Canada. A CBRE press release states, “Real estate is known for a fixation on location, but far-reaching global trends will overtake local details as the basis for many real estate decisions next year.” Can you think of a province that’s been hit by “far-reaching global trends”?


Alberta has seen the most drastic change in its “investment calculus,” as both rental space and rates have plummeted. Calgary will take a few black eyes: with the wave of capex cuts and job losses, office vacancy rates in Calgary will continue to rise into 2016, hitting a projected 18 per cent, without peaking until Q3. Overall investment is expected to remain close to 2015 levels (even jumping in some asset classes), which sounds fine, but Calgary’s 2014 investment was about $2.5 billion; 2015 was less than $1.5 billion. The discrepancy is most acute in office properties, where $709 million of investment in 2014 will degrade to a lowly $267 million in 2016. (That’s better than 2015 investment though, which was $105 million.)

Edmonton, meanwhile, will suffer from the drop in oil prices, its over-zealous construction, and its crippling absorption rates that left the market awash in vacancies well before oil hit $40. Lance Frazier, a senior associate in investment at Cushman and Wakefield Edmonton, says Edmonton is “somewhat insulated” because of its young population and its government and health care industries. But “the challenge we’re going into will continue with the slump in the oil patch,” he says. “Investment levels for 2016 will likely be lower than investment levels in 2015, which were a challenge.” In keeping with CBRE’s survey that showed investors consolidating around super-prime properties, Frazier says that while Edmonton is an affluent city, “Where we’re going to miss out on the investment levels is the larger transactions with nationals and multinationals – that business will slow down significantly because Alberta is not perceived as a place to invest [in commercial real estate].”

If there’s a silver lining it’s that Calgary’s presence as a logistics hub means the industrial real estate market is more dextrous than its counterparts in office, retail and multifamily properties. It’s the only sector in which the availability rate has actually declined, and it’s poised to benefit from the shrinking construction costs the CBRE is projecting. And in Edmonton, the industrial sector will see a 50 per cent drop in new supply. Of course, take into account the extent to which the commodities rout has sidelined the industrial sector and this reads as more of a pyrrhic victory than a ray of sunshine.

*2015 numbers are forecasted until the end of 2015

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