Industrial real estate shows resilience
When Ontario-based company GESCO first considered expanding its logistics centre in Western Canada — where its flooring business is growing — it scouted the region before deciding to enlarge its existing facility in Calgary.
Announced in February, the project will eventually see the company expand its existing logistics centre to 170,000 square feet, where it ships products such as carpet, tile and hardwood across the country from the building in southeast Calgary.
“We looked at a variety of locations and chose Calgary for good reasons,” company chief financial officer Mike Devon said Monday.
“It’s in the middle of Western Canada and it has good access north, south, east and west. And I think the infrastructure is good….”
“The Alberta economy has been a challenge for us for the last year or so, but we’re confident long-term it’s a good investment.”
While the vacancy rate in Calgary’s downtown office market pushes past 25 per cent and elicits hand-wringing from politicians and business leaders, another segment of the real estate market — industrial commercial space — is showing more resilience.
Spurred on by the Calgary area’s presence as a growing transportation and logistics hub, the industrial real estate sector has weathered the recessionary storm in better shape.
Companies such as Home Depot, Walmart, Canadian Tire and Sobeys all have large distribution operations in the Calgary area. Others are on the way.
In total, there are almost 5,000 transportation and logistics businesses active in the Calgary area, employing about 71,000 people.
A new report by real estate firm Cushman & Wakefield found between mid-2014 and the first quarter of 2017, Calgary’s industrial real estate market expanded by 2.6 per cent, even with the carnage caused locally by the steep decline in oil prices.
The Calgary area gave up its place as the hottest industrial market in the country — a position it held for much of the past 17 years — but it only trails Vancouver and Toronto.
Its growth also remains ahead of cities such as Montreal, Ottawa and Edmonton.
“Given the turmoil in Calgary’s downtown office sector, it is remarkable that Calgary’s industrial market took third place in the ranking,” the report states.
“Its importance as Western Canada’s distribution hub has been clearly established in recent years.”
That’s not to say the industrial sector — including warehouses for food or consumer products, as well as manufacturing, fabrication and transportation — hasn’t been affected by the downturn.
The overall industrial vacancy rate in the city has risen from 4.3 per cent in the first three months of 2015 to 8.9 per cent in second quarter of this year, according to the firm.
But Stuart Barron, Cushman & Wakefield’s national director of research, notes much of the rise in the local industrial vacancy rate was caused by the addition of about 6.9 million square feet of new product to the market since the fall of 2014.
“We have certainly seen softening in overall market conditions, no question about it, but it’s misunderstood. The rise in vacancy in Calgary has been predominantly caused by very significant new development activity — not bankruptcies,” he said.
“This is the bottom. And the bottom, from an industrial perceptive, really wasn’t that deep.”
Despite the recession, firms such as GESCO, Hopewell Logistics, J.M. Smucker Co. and Whirlpool Canada have expanded or opened new distribution centres in the Calgary region recently, noted Chris Saunders, Cushman & Wakefield’s senior vice-president in Calgary.
“Calgary is a place to do business for warehousing and distribution and the more volume that’s here, the more momentum we have,” he said.
The local area, including Rocky View County, has some cards to play in its favour.
A report by the Van Horne Institute last year pointed out more than 70 per cent of industrial real estate in Calgary is warehousing and distribution oriented, with the remainder mainly used in manufacturing.
Calgary’s strengths include access to a market of more than 20 million people within a 1,000-kilometre radius, and the city has large amounts of land available for industrial expansion, it noted.
The city also has strong rail and highway links, while the airport just completed a major expansion. There’s also more potential for growth in this area of the economy, even with the province crawling out of the recession.
A study for Calgary Economic Development this year noted transportation and logistics account for about 10 per cent of the city’s employment and nine per cent of its economy.
It found adding another 12 distribution centres would contribute $156 million to the Calgary region’s GDP.
“For us it’s probably one of our highest priorities right now,” said Mary Moran, chief executive of Calgary Economic Development.
With relatively inexpensive land, excellent transportation links and available workers, “we are better positioned than anybody in Western Canada,” she added.
There are some signs the industrial market is starting to turn, although it will take time to show steady improvement, Barron said. He expects to see the industrial vacancy rate start to stabilize or drop by the fourth quarter of the year, or in the first three months of 2018.
“The office sector itself will be a much more slower effort towards that recovery,” he added. “Industrial has outperformed itself and has essentially put itself in a position where we can expect recovery far more rapidly.”