Edmonton commercial real estate market – interim update

Note: This is an interim update for the Edmonton commercial real estate market, based on transactions through to the end of August 2022. Altus was only able to tally sales that transacted through August 2022 as part of our year-end 2022 analysis due to processing lags at the Alberta Land Titles registry. Addressing this delay led to a recalculation of the timing of Albertan investment totals in 2022 and 2021. The Q4 2022 update will be available at a later date when the fourth quarter title registry data is made available.

Investors in Edmonton’s commercial real estate market continued to transact despite a highly volatile macroeconomic environment and heightened cost of capital in 2022 with purchasers focused on acquiring industrial assets, apartment buildings and ICI land, which formed a significant portion of the $2.21 billion in sales proceeds generated through August 2022 and marked a 19% increase over the total investment proceeds of the first eight months of 2021.

Like other markets in Canada, investment in commercial real estate in the Greater Edmonton market improved year-over-year in the first half of 2022 with $1.77 billion in sale proceeds compared with $1.39 billion in first-half 2021. The heightened concerns around inflation as well as rising interest rates that started to manifest in deal and dollar volumes in the second half of 2022 appear initially to have done little to deter investment activity with proceeds of $447 million recorded in July/August of 2022 compared with $468 million in July/August of 2021.

Figure 1 - Edmonton market area: Property transactions – all sectors by year

According to the results from Altus Group’s most recent Investment Trends Survey, Edmonton was tied with Quebec City as the least preferred market in Canada in which to invest. Survey participants indicated Edmonton had no preferred assets among the top 15, while among the 15 least preferred assets Edmonton had enclosed community malls and tier II regional malls.

Average cap rates increased across all asset types except for suburban multiple-unit residential, which compressed slightly to 4.7%. Edmonton had the highest average cap rate in the major Canadian markets at 5.80% and the second highest average asset cap rate in major Canadian markets for downtown class AA offices at 7.1% (second to Calgary).

Figure 2 - Edmonton market area: Property transactions by asset class YTD Aug (2021 vs. 2022)

Investment dollar volume in the Edmonton area for industrial properties, apartments, hotels and retail assets in the first eight months of 2022 exceeded proceeds from those asset classes recorded in the same period in 2021. Industrial sales of $813 million dominated overall investment in Edmonton, comprising 37% of the region’s total dollar volume through August 2022 and bested the $681 million in industrial sale proceeds recorded in the same period in 2021. Investment in Edmonton-area apartments achieved $535 million in the first eight months of 2022, the second most dollar volume by asset class recorded through August 2022 and a notable 33% increase from the same period the year previous.

Investment in land (both residential and ICI) totalled $468 million through August 2022, a 12% decrease from the same period a year earlier. ICI land generated $354 million in proceeds through August 2022, a slight decline of 1.4% when compared with the same period in 2021.

However, residential land sales captured just $113.8 million in the first eight months of 2022, a 34% decrease from the total recorded through August 2021. Interestingly, investor interest in acquiring retail assets perked up notably with $288 million invested through August 2022, a remarkable doubling of volume from the first eight months of 2021.

Office investment slumped slightly to $80.6 million through August 2022 down 12% from the same period a year earlier. Investment in hotel properties achieved $30.2 million in sale proceeds through August 2022, up from $13.8 million in the same period of 2021, but more notably the investment represented the most dollar volume invested in the asset class since the first nine months of 2018.

Figure 3 - Edmonton market area: OCR trends – 4 benchmark assets classes

Notable transactions

The following are notable transactions for the Edmonton commercial real estate market during Q3 YTD August 2022.

Skyline Industrial REIT Alberta Industrial Portfolio 2022, Edmonton – Industrial

Two industrial properties in Edmonton were sold by HOOPP Realty to Skyline Industrial REIT as part of a $309 million portfolio sale in August 2022. The Edmonton assets were valued at $161.75 million. The portfolio, which also included four buildings in Calgary, comprised approximately 2.15 million square feet and represented the largest industrial sale of the year in the province through August 2022.

Midtown Estate Apartments, Edmonton – Apartment

This recently completed concrete six-storey apartment building was sold to Canadian Apartment Properties REIT for $22.5 million in July 2022. The price worked out to $357,143 per door, the second-highest per-door price achieved in the first eight months of 2022. Only the $90.1 million sale of The Augustana in May 2022, which was Edmonton’s largest apartment transaction through August 2022, achieved a higher price-per-door.

3650 & 3850 98th Street NW, Edmonton – Industrial

This 285,000-sf warehouse & distribution building on 14.47 acres in Strathcona Industrial Park was sold to owner/occupier Grizzly Trucks for $21.9 million in August 2022. Subsequent to the sale, the building was occupied by Wolseley Industrial, Meridian, Civeo, Red Table Foods and Grizzly Trucks.

The sale of industrial assets and apartment buildings is expected to remain the primary drivers of activity in Edmonton’s commercial real estate investment market through the remainder of 2022 and into 2023.

Ongoing investment in retail assets as well as ICI land is anticipated to contribute to strong deal and dollar volumes that should be reflected in the full results of the third quarter of 2022. Edmonton has benefited from positive net in-migration from the rest of Canada (although less than Calgary) due in part to its lower cost of living relative to other Canadian metropolitan areas in a time of high inflation and eroding housing affordability measures.

As a result, some investors appear to be attracted by the higher-than-average returns possible in Edmonton and many continue acquiring asset types that help support the demands generated by a growing market benefiting from some positive market fundamentals despite broader monetary headwinds.