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The light at the end of the tunnel beckons

By all accounts, Alberta’s economy is witnessing signs of resurgence and the recession which plagued the province for the last two years is nearing an end. The question is whether this resurgence translates into growth for commercial real estate (CRE) in the region. We at JLL believe that it does and we foresee that, in 2017, the market will see an uptick in investment and leasing activity. The Trudeau government’s announced “supercluster” initiative along with Federal approval of the three pipeline projects (the Trans Mountain Expansion, the Line 3 replacement program and Keystone XL) has boosted spirits in the oil patch. With more than $14.5 billion in public and private spending underway, or to be invested, the Alberta economy will see economic growth in the coming years. 

Alberta has a lot going for it. The prospect for recovery this year, although modest, is now increasingly likely. Most economic indicators, including retail activity, housing prices and the labour market, are showing signs of stability and gradual improvement. Following two difficult years which saw a plunge in energy investment, a surge in unemployment along with a multitude of factors which caused an economic crash, seeing light at the end of a dark tunnel is welcome news. 

Oil prices are showing signs of stability 

At the beginning of 2017, oil prices began to rebound after news of pipeline developments and production cuts by the OPEC lifted optimism in the market. For the most part, West Texas Intermediate (WTI) oil prices have stayed in the US$50-$53 range. The Western Canada Select (WCS) benchmark recently traded at its highest level since mid-2015 (US$40 per barrel), and more importantly, at more than double the levels that prevailed at the beginning of 2016. The rebound in oil prices have led to a pickup in drilling activity as well, as both Suncor Energy and Cenovus Energy have announced large capital investments, with Suncor announcing a $5.2 billion spending program, and Cenovus investing $1.4 billion in its oil sands projects in 2017.  

We tracked net office rents in the Calgary CBD and compared them to crude oil prices (both rebased to 100) and noticed a considerable time lag. Even when oil prices were at the lowest due to the supply glut, net rents across Calgary’s office market only began to decrease after a lag of at least two quarters. We understand that reversing the phenomenon will take longer due to the high office vacancy rate which the market is currently experiencing. To counter this, landlords now are propping up rents by providing a slew of incentives to maintain building valuations. As oil stabilizes and capital projects come online, we note that the pace of negative absorption appears to be easing, with demand proving most resilient in higher quality spaces. “In the last 18 months, there have been 12 leasing transactions of greater than 50,000 square feet in calgary’s downtown market, six of which were greater than 100,000 square feet,” says Brett Miller, CEO of JLL Canada. “Companies took advantage of the tenant market to secure long term space at low rents but these bargain deals will soon dry up.”

Alberta, JLL Research, NYMEX
Source: JLL Research, NYMEX

The industrial market, too, is experiencing renewed optimism since the beginning of 2017. Oil and gas companies that were forced to downsize in the recent recession are actively absorbing vacancy in order to get ahead of the strengthening market. As such, vacancy and asking rents have begun to stabilize and we expect this trend to continue. Case in point, Southeast Calgary experienced 355,000 square feet of net absorption in the first quarter of 2017 and the vacancy rate decreased 40 basis points from 6.5 per cent to 6.1 per cent quarter-over-quarter. 

Rebound in commodity and non-commodity manufacturing 

As of March 2017, manufacturing shipments rose to $5.8 billion, up two per cent over February 2017. From manufacturing’s lowest point in February 2016, we note the increase in manufacturing shipments in Alberta by 17 per cent. While this may not be enough to get back to pre-recession levels yet, shipments have been steadily increasing in the last 12 months which heralds a positive sign for the industrial market. 

Within manufacturing sales, refined petroleum products are making a comeback as shipments are up 53 per cent on a yearly basis. Even though the energy side of manufacturing is beginning to pick up and prosper, we note the growing optimism in the agri-food and food processing industry. Along with oil and gas, these sectors are expected to drive growth forward in Alberta. Beverage manufacturing, which includes micro-breweries and distilleries, is also profiting as businesses find new markets and opportunities. 

We have seen investor demand in Alberta increase significantly. The market perception is that a recovery phase is underway in both the economic and real estate fundamentals. We expect real estate transaction volumes to increase as market liquidity has returned. 

Peter Zorbas, executive VP for Capital Markets, JLL Canada. 

The Calgary southcentral and northeast industrial submarkets are in recovery mode, albeit at a slower pace than the southeast, with vacancy and asking rates stabilizing. As asking rates have nearly bottomed out, Calgary is experiencing an increase in overall tenant demand in these areas as the gap between asking rates and deal completion rates shrink. This sense of re-balancing and optimistic recovery across all sub-markets has led to the stabilization of vacancy rates and the first positive net absorption rates recorded since Q2 2016.  

Investment demand for industrial product in Calgary and Edmonton has increased as a nationwide lack of supply continues. With fewer projects left in the pipeline and with net rents beginning to stabilize, we expect availability to fall over the year. We note the rising interest among institutional investors that are currently looking to secure prime development or redevelopment sites and build customized product.  

Major infrastructure spend to come 

Calgary has ramped up infrastructure spending by approximately 30 per cent over the past year in response to the economic downturn and plans to continue that trend well into 2018. The boost in capital spending is a deliberate move taken by the city to meet its growing infrastructure needs while also stimulating the local economy. Overall, the Alberta government is investing a record $9.2 billion into health facilities, roads, maintenance, environmental initiatives and other projects under its massive construction, repair and upgrading plan. The recent Budget 2017 forecasts oil at $55 per barrel and bitumen production is set to ramp up to 2.9 million barrels per day. With new pipelines coming online by 2021, we expect the economy to improve even further. 

The end of the tunnel 

Alberta’s fortunes are changing for the better. The province is witnessing an increase in drilling activity and job growth, and Bay Street analysts expect oil to hover in the US$50-$60 range in the short term, rising to US$65 levels by 2020. Overall, we expect the economic turnaround to be gradual, a departure from Alberta’s typical “boom-bust” pattern of past economic cycles. 

While the office market may face a prolonged struggle to work through the overhang of past development activity, near-term prospects for the rebound appear brightest in the industrial market. Retailers haven’t given up on Calgary despite the economic slump, as the city still boasts the highest income per capita in the nation. This, taken together with home prices that have displayed resilience, has allowed the sector to withstand the downturn better than other commercial real estate segments. Noting the current investment environment, private investors are on the lookout for value-add opportunities across the office, industrial, retail and multifamily sectors.  

On the other side of the spectrum, institutional buyers are seeking core properties with renewed vigour. For example, Calgary saw a spurt of investment activity in the first quarter of 2017, greater than all of the combined transactions in 2016. Slate’s acquisition of the Dream portfolio and HOOPP’s acquisition of a 50 per cent interest in TransCanada Tower provide important benchmarks for valuation.   

Gaurav Mathur is Research Manager, Capital Markets at JLL. For more information visit  


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