Industrial real estate rental costs down by 4 per cent

Tenants renew early to take advantage of dip

Landlords of industrial real estate in Calgary will be focused on their tenants, aggressively pursuing renewals to limit or reduce exposure to potential vacancy in their portfolio during what could be a prolonged economic downturn, according to a report by Cushman & Wakefield.

Brent Johannesen, vice-president of industrial sales and leasing for Cushman & Wakefield in Calgary, said the vacancy rate in the city has increased slightly to five per cent with the completion of a significant amount of new construction in the second quarter of this year.

“The year-to-date leasing activity sits at over two million square feet and is down from a very active 2014 which experienced over four million square feet of activity in the second quarter,” he said.

“Many tenants we are working with are taking advantage of the times by choosing to renew early.”

The overall vacancy in the industrial real estate market is actually the same as it was a year ago but the average net asking rent per square foot is down 4.1 per cent to $9.79 from $9.41.

Leasing activity is also down from 4.1 million square feet to 2.3 million square feet year-to-date. There is 2.3 million square feet under construction, with 1.4 million square feet completed in the second quarter.

“While many tenants are waiting to see the impact of the softening economy resulting in a slowdown of overall leasing activity, renewal activity is still brisk. At this time, landlords are becoming more aggressive with incentives ... which is correlating into lower net effective rates,” said the report.

“It is anticipated reductions in net rental rates will accelerate as we move into the second half of the year.”

Susan Thompson, research manager at Calgary Economic Development, said the city’s industrial real estate market is just starting to see some impact from the slowdown in the energy sector.

“(Landlords) are going to do what they can to keep their tenants happy and in place,” she said, adding that much of the construction taking place in the market is built-to-suit which have commitments in place for space.

The Cushman & Wakefield report said many well-positioned investors are still looking to take advantage of current economic conditions and to expand their portfolios.

“Although there are many industrial buildings still under construction, we have seen the development community delay and postpone planned developments as they wait for the market to absorb the vacancy that already exists,” it said.

“C&W anticipates that for the balance of the year we will see some companies that are unable to maintain positive cash flow and likely see some distress sales as the economy works toward recovery.”