The Altus Report: Trends in the Calgary and Ottawa market areas
as published in Informa’s Canadian Real Estate Forum Magazine – Fall 2019
By Kruti Desai, Manager, National Research Insights & Raymond Wong, Vice President, Data Operations
Ottawa remains a favourable investment market, while Calgary aims for growth
In this issue of The Altus Report, we discuss real estate trends in the Calgary and Ottawa market areas.
The Canadian economy has shown signs of resilience in the past year and continues to remain in a robust and competitive state as the global economic outlook teeters amid escalating US-China trade conflicts, and energy and geopolitical uncertainty. Domestically, interest rate hikes have stalled, and the economy looks to be operating close to potential with inflation holding steady at the 2% target. Canadian investor sentiment remained relatively flat, yet cautious across all sectors as the market adapts to evolving economic conditions.
Canadian investment volume declined in the first half of 2019 by almost 21% to $22.3 billion compared to the same period last year at $28.1 billion. Investors continue to seek asset types that add to the diversification of quality income streams with Land and Apartment being among the most active sectors. The Ottawa market area had the highest increase in investment activity with total volume going up by 52% to $1.1 billion compared to the first half of 2018 at almost $732 million.
Ottawa is a transforming city and still has room for growth with several strategic redevelopment projects in the works. Expansions in infrastructure, with the arrival of the new LRT line, may open up opportunities for new development. According to Altus Group’s Investment Trends Survey for Q2 2019, Ottawa also saw a positive buy/sell momentum with Multi-Tenant Industrial, Downtown Class “AA” Office and Suburban Multi-Res topping the list as the most preferred product-market combination.
In Calgary, transaction volume declined by 26% to $1.2 billion, and deal counts dropped by 24% in the first half of the year compared to the first half of 2018. However, the Calgary market showed improvements in the buy-sell momentum ratio with Single- and Multi-Tenant Industrial and Suburban Multi-Res being the top preferred product types according to the Altus Group’s Investment Trends Survey.
At the same time, a growing tech sector and warehouse and distribution sectors are maturing at a rapid pace and strengthening leasing activity and sales within both markets. To remain competitive and boost economic growth, companies are partnering with the federal and local governments and actively working together to attract and retain the right labour force for the future.
Chase for yield – Calgary and Ottawa trending up
Top 5 and bottom 5 favoured real estate segments – Q2 2019
National investment volume weakens
Emerging Technology Firms May Help Alleviate Vacancies
Overall employment growth tends to lag behind overall economic activity, which may indicate a potential slowdown in the labour force in the next year due to a decline in investment activity. Therefore, growth in the working-age population will be a crucial factor in addressing labour and skilled worker shortages in order to sustain economic growth. Canada’s unemployment rate remained stable in July and August at 5.7% according to Statistics Canada, while overall employment saw gains predominantly in the financial services, professional services, and education sectors.
While the top employment in Calgary centres around the energy sector and in Ottawa, the federal government, both markets are also being influenced by a strong tech sector which has been tempering office vacancy rates. Immigration programs targeted towards skilled workers have boosted employment within this sector, and government investment into new and emerging technologies has also signalled employment opportunities in both markets, which may increase competition of high-quality space. As quality space and limited talent become more constrained, companies may be forced to raise wages as a way to attract and retain talent or look to secondary locations with higher availability of workers and office space.
Ottawa’s high-tech region of Kanata has attracted several major tech players in the last few years from Apple Inc. to Nokia, to Blackberry QNX and last year Ford Canada, which took over 40,000 SF for its connectivity and innovation centre, while also securing a 62,0000 SF building from Cominar for another research facility expected to open by 2020. Ford also secured another 20,000 SF on the same street to support its expansion plans. Ottawa’s office market is even tighter than Calgary with vacancy rates dropping to 8.0% in the second quarter of 2019, the lowest level since 2014.
This trend may impact the growth of the tech sector within the city as competition with the public sector pushes tenants to seek availability within Class C buildings. Almost 290,000 SF of Class A office space in the Ottawa Market Area is under construction with an availability rate of only 15.1%. No new construction is underway in the downtown Ottawa area. DREAM recently secured a 15-year lease with the federal government for about 158,000 SF of office space in Zibi Block on Booth St, a prime location minutes from the CBD. The building will include a mix of more than 450,000 SF of retail and commercial space and is expected to be completed by late 2020. As of Q2 2019, only 4 Class A buildings in the downtown core were 100% available for preleasing with a combined space of almost 1.5 million SF.
National office vacancy rates inch downwards
Calgary’s downtown office market, as well as its labour force, continues to deal with job losses from the oil and gas sector, but the tech sector has helped bolster some of its office leasing activity. Alberta overall had some slight gains in employment from the information, culture and recreation sectors, which offset some of the losses in the energy sector. Although Calgary’s unemployment rate rose slightly to 7.3% in August from 6.9% in July, its office market is slowly recovering. Calgary’s downtown office vacancy rate dropped to 21.5% in Q2 2019, from 22.8% a year earlier.
Fight to quality continues in office space due to lower rental rates as the demand for Class AA spaces increase. With limited availability in the core, several suburban office markets have been outperforming the downtown market in both Ottawa and Calgary. Vacancy rates fell below the downtown rate in areas such as Gatineau, Ottawa West, Nepean and Kanata, and in Calgary’s Beltline, and North and South Calgary.
Many technology firms have already settled in Calgary and looking to expand, but the issue has been finding skilled talent, not space. A recent announcement from BC tech firm Finger Food Advanced Technology Group stated the company would be opening its first tech centre in downtown Calgary by 2023. No news has been announced on the exact location of the centre. The company is a tech-solution provider to many large companies like Suncor, Enbridge, Microsoft, Lululemon, and Telus.
Calgary’s Opportunity Investment Fund has been helpful in attracting companies to the region and creating tech jobs. The City launched the tech investment fund in 2018, which helped add jobs to the city and is open to private companies, non-profits, as well as public institutions. The fund has since increased more than 1,000 jobs and has also led to $150 million of investment into the region.
Office markets await arrival of new supply
Workspace needs are changing: Modernization and Flexibility are Key
The rise of innovative, vibrant spaces and modern amenities in the workplace are still a thing of the present. Landlords are investing mega-dollars to future proof their assets as a means to address high vacancy rates and attract tenants. In Calgary, Oxford Properties invested $40 million in redeveloping the four-tower Bow Valley Square office/retail complex. The upgrade will add an array of amenities such as a HUB tenant lounge, a sports area, multiple meeting room centres, a park site, and a rooftop patio which include bocce ball, ping pong tables and beehives. One of the towers will also include OxWorx, a modern co-working space that will occupy two floors of the building and has already been 90% leased. OxWorx provides flexible lease terms and allows tenants to lease a single desk or an entire office. The property previously underwent an exterior renovation a few years back.
Companies like Oxford continue to invest in their assets and stay competitive as they adapt to the changing workforce by providing a diverse range of options from newer amenities to flexible office spaces. This trend mainly caters to tenants looking for flexible work environments such as tech companies, professional services firms, contract or “gig” workers as well as mature companies looking for satellite office spaces. Reducing commute times and achieving a work-life balance may be another factor for tenants to choose coworking spaces. Coworking company WeWork will be opening two downtown office spaces: The Edison at 150 9th Ave. S.W. occupying 76,000 SF and set to open at the end of 2019, and; Stephen Avenue Place at 700 2nd St. S.W. which is expected to open by early 2020 and occupy 66,000 SF.
Global workspace company Spaces will be opening their first Ottawa location by occupying 75,000 SF of office space at 66 Slater St, a former modernized government building owned by KingSett and located near Confederation Park and Parliament Hill. Toronto-based iQ Office Suites also recently announced their location in the Ottawa region at 222 Queen St. and will be occupying over 13,500 SF of space. iQ Office Suites will also be expanding locations in Vancouver, Toronto, Calgary and Montreal. Innovation, entrepreneurial and incubator hubs are also making an impact in office. Impact Hub will be expanding its office by moving up a floor at 123 Slater St and will be occupying 6,200 SF, after taking up 10,000 SF of space just a few years ago.
And it’s not just in the private sector. In Ottawa, the federal government initiated a 2-year pilot project to set up coworking spaces for its government workers. Two coworking offices were opened at the renovated L’Esplanade Laurier located in downtown Ottawa and at 335 River Rd. near the Ottawa airport. The feds have plans for further expansions in the Ottawa and Gatineau region and across the country in Toronto, Laval, Dartmouth, Vancouver and Edmonton.
Strong demand and tight supply for suitable industrial space
Limited New Supply for Industrial
It is no surprise that Industrial product sits comfortably at the top of the list as one of the most attractive asset classes this year, according to Altus Group’s Investment Trend Survey in Q2 2019. Supply continues to be a challenge, yet the industrial leasing market has remained active. In Ottawa, industrial vacancy rates have shown a continuous drop in the past year from 2.7% in Q2 2018 to 2.0% in Q2 2019. As for new supply, Amazon’s new 1 million SF fulfilment centre in Ottawa’s Cumberland region was completed in Q2 2019 and was the only completion in the entire region since the end of 2017. Recently, Concert purchased 90% interest in the distribution facility, while Broccolini will retain its 10% share. It is now the largest industrial building in Ottawa. Costco recently purchased almost 15 acres of ICI land located near Gloucester Centre which already has plans for redevelopment.
Calgary’s industrial vacancy rates rose to 7.0% in Q2 2019 from 6.3% in Q2 2018 and construction in Calgary was slow. Only two buildings at the Hawthorne-Stevenage Business Park were under construction as of Q2 2019, with each building totalling 47,680 SF. The largest completion was Hopewell’s Building 1 at its 38-acre South Calgary Distribution Centre of almost 500,000 SF in the Great Plains industrial park. With a lot of older product in the Calgary market, demand for more modern state-of-the-art facilities with higher ceilings will continue to strengthen as e-commerce, and other distribution sectors compete for quality product.
Featured investment property sales transactions
Geopolitical uncertainties, escalating global trade tensions along with low oil prices and pipeline expansion hearsay will continue to put pressure on Canadian investment and economic growth. However, with robust employment growth and high population gains in urban areas due to immigration, the Canadian market is expected to remain healthy as investors and companies maintain a steady appetite in core markets.
Investors are seeking better yields and will continue to focus their efforts on diversification, seeking well-priced product in prime locations, and strategically obtaining significant trophy assets to achieve their goals. Real estate firms have also been investing more capital into upgrades, retrofits and newer amenities to attract and retain tenants and talent and keep up with demand. Outdated supply may be impacted due to the need for more modern, high-quality product from the tech, logistics, and warehouse & distribution sectors, putting more pressure on new product completions.
The tech sector continues to be one of the strongest drivers of change in the office market, demanding more innovative, amenity-rich workspaces for their employees. The evolution of the workplace is being driven by changing behaviours and the power of newer technologies leading to a demand for more flexible workspaces. Over the past few years, Ottawa has increasingly become one of the top, stable markets partly from the federal government’s presence as well as an expanding tech sector.
With expansions in infrastructure and the new LRT line, people and businesses will be able to move more efficiently throughout the region which will help better distribute growing industries and populations. Calgary on-the-other hand faces its own future to be a sustainable and attractive market and will be dependent on how well the city strategically plans and adapts to growth in the years ahead.