The commercial real estate industry in Calgary has rebounded rapidly since the recession, bolstered by strong growth in employment, retail sales, and investment in resource-based and supporting industries, says a report released Tuesday by BMO Economics.
The report also said the continued strength in Canada’s real estate industry, along with the expectation of low interest rates in the medium term, should provide added appeal for investors looking for income-producing commercial real estate properties.
Earl Sweet, senior economist and managing director of BMO Capital Markets, said the vacancy rate for Calgary office properties has fallen sharply from a peak of 15.7 per cent at mid 2010 to the vicinity of six per cent by the first quarter of 2012.
“This huge decline is particularly impressive give substantial new space that has come onto the market (including the Bow),” said Sweet. “The high rate of absorption reflects heavy investment in non-conventional oil and the positive impact of this on supporting business and professional services.
“The retail property market in Calgary is being supported by the fastest retail spending growth in Canada . . . The industrial property market is receiving support from strong growth in wholesale trade.”
After a severe and protracted market downturn in the 1990s, the commercial real estate industry in Canada has been characterized by cautious development and prudent lending practices, added Sweet.
He said several factors make the sector attractive for investors: supply is limited, with vacancy rates lower than historical norms across segments in many cities; risk-averse operations have helped to improve balance sheet performance of developers, construction firms, and realtors; robust corporate performance – along with lending discipline – have maintained the quality of real estate loans at a high level; and ultralow interest rates have supported real estate development and prices in Canada.
“The commercial real estate industry benefits from the healthy condition of Canada’s financial institutions, the participation of large, well-funded operators and institutional investors, whose long-term objectives reduce volatility during downturns,” said Sweet. “Higher occupancy – spurred by steady growth in employment, manufacturing, wholesaling, and retailing – is reducing office, industrial, and retail vacancies, while lease rates are edging upward. Meanwhile, large U.S. retailers are targeting what they view as the underserved Canadian market for expansion.”
He said the market is likely to grow at a more tempered pace this year and next, with Canada’s economic growth expected to ease to 2.0 per cent.
In a recent report by CBRE Limited, Calgary was listed 46th in the world for most expensive office markets. The company’s Prime Office Occupancy Costs report placed Calgary’s downtown second in Canada to Toronto’s downtown. The Global 50 Index listed the world’s most expensive markets based on occupancy costs in United States dollars per square foot per year as of the first quarter of this year. Calgary’s cost was $65.36. Toronto was $71.16. Vancouver placed 49th overall at $63.73.
Capitalization rates are calculated by dividing net operating income produced by an asset and the asset’s current market value.
CBRE said competition for quality real estate remains elevated in the country.
“It may be difficult to believe that cap rates could fall much further, but with interest rates set to stay low for the foreseeable future, it is conceivable that cap rates may indeed go even lower,” said CBRE
By Mario Toneguzzi, Calgary Herald July 24, 2012
0 comments on “Calgary’s commercial real estate industry rebounds from recession”