Chris Saunders is senior vice-president, Industrial Sales and Leasing, for Jones Lang LaSalle (JLL) in Calgary.
Why has the Calgary area industrial real estate market been so resilient even with a challenged economy?
Saunders: Our industrial market began diversifying away from oil and gas in the mid 1990s when we started taking distribution and logistics companies from Winnipeg. Once that momentum began, it has never slowed and, if anything, it has actually picked up speed in the last several years in my opinion.
We are well established now as the distribution/logistics hub that services Western Canada and even parts of the northwest U.S. due to our population reach within a 12-to-24-hour drive, our location on the Canamex corridor and our airport cargo infrastructure.
The distribution footprint in the greater Calgary area is substantial now, and it is servicing a population base, so it is not as susceptible to massive swings like the oil and gas sector because people need to eat, buy clothing, etc.
There’s also a significant amount of disposable income in our city still purchasing electronics, etc., and all of that product needs to be warehoused somewhere. Couple this with the growing e-commerce industry and you get players like Amazon opening a facility in the area to service the need for quicker delivery times of products that are being ordered by people who expect faster and faster delivery times.
Lastly, we have other industry growth such as technology, cannabis production and processing, manufacturing of oil and gas and non-oil-and-gas goods, and even instructional/sport facilities taking large amounts of space. To give you a couple of examples, we sold a former pallet manufacturing building last year to a software developer and an oil and gas manufacturing facility to a wind turbine manufacturer. This diversification retains and grows employment, and it really has been a significant engine keeping our city going the last several years.
What do you forecast for the market in 2019?
Saunders: Our market experienced approximately 2.5 per cent positive growth in occupied space last year, which demonstrated confidence in our market from both owner/users and tenants looking to either grow or establish themselves in Calgary.
We like to see growth like this, it’s healthy and sustainable, compared to five to six per cent that we saw in previous boom years in Calgary, which was always a bit concerning on sustainability, inflation and restricted supply for companies looking for space.
We expect this year to be similar to last in terms of activity and if January was any indication, it will be a very strong year again in 2019.
We have new supply coming on stream, which will increase our vacancy rate from the low five per cent range to something into the six range, but that’s not an indicator of massive bankruptcies or downsizing of companies, it’s simply due to investors and developers showing confidence in our city by constructing new, large, state-of-the art distribution facilities on a speculative basis, meaning no pre-leasing, which will help facilitate growth in that industry.
We expect land sales to occur at a steady pace due to developers and owner/occupiers positioning for long-term growth.
We also forecast a continuation of diverse industries back-filling former oil-and-gas facilities with other uses such as renewable energy manufacturing, and cannabis production and processing.
What are the most popular uses for industrial real estate in the Calgary area?
Saunders: As I mentioned, the distribution, logistics and transportation industries are number one in our market, followed by manufacturing, service, recreation/instructional, and the cannabis production and processing sector is coming on strong.
We’re even seeing alternative food producers establishing themselves in our market.
Why has Balzac become such a magnet for this market?
Saunders: Balzac has established itself as a district or sub-market within the greater Calgary area. People don’t look at that market with question marks anymore, as they did five to 10 years ago. We’ve had very large and credible investors and developers constructing these state-of-the-art buildings on speculation and they’re being leased by very large and credible distributors and retailers, so it’s now on the map in a big way.
The decision-makers for companies such as Amazon, Walmart, Sobeys, Smucker’s and Gordon Foods, to name a few, are very sophisticated with their location and cost modelling and have chosen Balzac for good reason. Its location to major highways lowers transportation costs, the cost of land is lower, as are property taxes. There is also no business tax in Balzac.
With everything going on downtown and the city needing to redistribute the tax base, the low cost margin in Balzac is going to widen as industrial properties within the city get hit with higher tax.
Combine all of this with significant availability of large parcels of fully-serviced land, compared to lower inventory in Calgary city limits, and you can see why the growth in this region is going to continue. We like to say that activity brings activity and this region has a lot of momentum.
Is there a market for condo ownership in industrial real estate?
Saunders: Yes, absolutely there is, and that’s been demonstrated by the absorption of many industrial condo projects in our market in the last number of years.
Developers such as Hungerford Properties, Beedie and PC Urban, to name a few, are serving a niche market in our city by building or repositioning industrial condo properties. These are highly credible and respected developers building good quality product for long-term ownership, and they all happen to be Vancouver-based, seeking land opportunities outside of their home base due to much higher costs and lower supply compared to Calgary.
They’re constructing facilities that service different business needs, such as dock-height or grade-level loading, and different bay sizes that cater to different size companies. They’re creating ownership opportunity for businesses that would normally be leasing because they either can’t afford or don’t want to build their own freestanding building.
Purchasing a unit or several within a much larger building creates economies of scale and lower operating costs as they are shared among multiple businesses, things like landscaping and snow removal.
These business owners don’t look at the investment the same as traditional investors, that is, they aren’t shooting for a six to seven per cent yield for example. They’re saying, “If we can own for about the same or slightly higher monthly payment compared to leasing, let’s purchase and start growing equity.” Long term, this creates a retirement fund for the owner, so we don’t see the demand for this product type ever going away.
– Mario Toneguzzi for Calgary’s Business
Caption: Chris Saunders, senior vice-president, Industrial Sales and Leasing, for Jones Lang LaSalle (JLL) in Calgary.