Calgary's Commercial Market - November 15, 2001

The events of September 11th, 2001 have necessitated a review of our comments on the Calgary Commercial Market.

Markets across North America will be impacted as companies and individuals become conscious of a number of new considerations when investing and taking up new premises for their businesses. Landlords will need to enhance security and insurance coverage on buildings. Existing building codes, safety procedures, and backup systems will all need to be reviewed. This means increased operating costs which tenants will be required to absorb. Developers will reduce the mass and size of buildings, and height will no longer be a prestige thing.

Suburban locations for smaller office projects could become in demand, therefore, reducing the pull of the central business districts in cities. Rental rates for the high visibility prestige properties in the core of the cities could decline over time. Developers may hold off building until times settle down and become more predictable. Tenants in this new prospective will give thought to multi-premises locations with greater regional dispersal.

The massive head offices in major centres may become a thing of the past. Due to the economic uncertainties we can also expect businesses to stay put and revaluate premise changes in these uncertain
economic times. Finally, business travel will be reduced dramatically and teleconference facilities will become popular.

These are just some of the potential outcomes from the events in September. Hopefully, time will see confidence coming back and the consumer getting back to spending, which will drive the economy to recovery.

We can expect the Calgary market to pause and reflect on the impact of the September 11th, 2001 events. Consumer spending appears to be the area of greatest concern. The tendency will be to hold off on major purchases, giving people time to evaluate the impact of the world events. The world will still need our resource-based products, especially our energy and agricultural goods.

Therefore, Alberta should continue to have a solid economy into 2002, and the real estate markets should continue to be healthy.

Office Market Overview

The Calgary market continues to experience demand for office space in these unsettled economic times. This is primarily due to continued strength in the energy sector. Winter comes every year; therefore, demand will exist for our energy products. The downtown office market currently has an overall vacancy of 9.15%, with approximately 530,000 square feet of sublease space. While we expect this space to be taken up within the next six months, ongoing mergers and large acquisitions in the energy sector may provide more space to add to this supply. There should be a small amount of sublease space always on the market to satisfy tenants who are attracted to this sector of the market.

Currently there is an actual shortage of large blocks of contiguous office space in the core. Anyone looking for more than 100,000 square feet will have difficulty finding any selection. Rental rates continue to hold and
remain the same as the first of the year. The January 15, 2001 article sets out these rates.

In the Beltline, just south of the core, vacancy has moved up slightly to around 7.7%. But the big story is the new developments led by IBM, which has started development on a 340,000 square foot office headquarters on Eleventh Avenue between First and Second Streets. Plans have been announced for a
redevelopment of 540 – 12 Avenue S.W., as well as a new ten-storey office tower. The Lorraine Building is nearing completion, which is a redevelopment into office space.

Other proposed developments include Campeau lands, Colonel Belcher site, and the Atco sites. Rental rates continue to be the same for vacancies in the Beltline, and expectations are that the market will maintain these rates.

Industrial Market

In the first half of 2001, 1,158,000 square feet of new construction took place. The majority of the new construction took place in the southeast corner of the city. Vacancy rates currently stand at 5% overall. Rental rates range from $6.50 to $8.00 per square foot, based on the size of the bays. The market also has a good selection of space sizes from small bays of 2,500 square feet up to 25,000 square foot units.

Retail Market

Retail vacancies continue to be low as a result of limited new product becoming available. Space opportunities are primarily in the fringe areas of residential developments. Overall vacancy stands at approximately 3.2%. Asking net rental rates for retail property are as follows: strip centres are
$10.00 to $24.00 psf; neighbourhood centres are $10.00 to $25.00 psf; community centres are $18.00 to $26.00 psf; free standing pads are $23.00 to $32.00 psf, and enclosed malls are $20.00 to $100.00 psf.

The retail market is very diverse, and factors including location and type of centre, contribute in determining asking net lease rates. This sector of the market will be hardest hit if a recession does develop in Calgary. Consumer spending is the first area to be hit when the economy slows.

The market for retail space is not overbuilt; therefore, landlords should be able to weather any stormy conditions.

Investment Sales

The mid-year period of 2001 was very active with investment sales. There were a total of 53 sale closings over $1 Million from May to September. The demand for Calgary properties is extremely strong, with very little good quality product available. There are certainly some concerns resulting from the attacks on the U.S., however, demand still remains positive. Investors are also benefiting from low interest rates, and a reasonable availability of funds.

We anticipate continued demand by pension funds, and REIT’s for quality product. Investor purchases could decline in the next six months, due to a lack of confidence in the economy.

This represents an update of the commercial market article written in January of 2001.

Ron Smith, B.A., FRI, CMR -- Commercial Division Manager