Meltdown in office real estate feared
Report warns 'reckoning' approaching
Mario Toneguzzi Calgary Herald Wednesday, February 14, 2007
CREDIT: Dean Bicknell, Calgary Herald Randy Magnussen, head of Bentall Real Estate Services in Western Canada, at the official groundbreaking for the company's Jamieson Place office tower project on 4th Avenue and 2nd Street S.W.A national firm is warning that the Calgary office market is at risk of overheating given supply/demand issues and the resultant spike in rental rates.
The Barnicke Report -- Global Views, by J.J. Barnicke Limited, also says increasing construction costs in Alberta are becoming a concern and could put a damper on future capital projects. The report comes one day after Statistics Canada released a report showing the rise in Calgary construction costs led the nation in 2006, soaring by almost 19 per cent from the previous year. Also on Tuesday another report by RealNet Canada Inc., said a record number of commercial real estate transactions in 2006 represented $3.5 billion in business investment in the Calgary market with the sales volume increasing by 34 per cent from the previous year.
"Renewals at $45 per square foot (in Calgary) on an 'as is' basis are not sustainable," wrote Joseph Barnicke, chairman of J.J. Barnicke, in the Global Views report. "The day of reckoning will come in 2008-09 when three to four million square feet of new office supply comes on stream and is occupied from existing properties in the market . . . With the significant amount of supply coming on stream in Calgary, the market should prove very interesting. "Only the foolhardy would venture to make future projections on rents."
Randy Magnussen, senior vice-president and general manager, western region, for Bentall Capital, said the company currently has six buildings under various stages of development in Calgary totaling 2.5 million square feet. "Construction costs in the last probably 18 months have been going up about 1.5 per cent per month or about 18 per cent on an annualized basis," said Magnussen on Tuesday at the official ground breaking for the company's Jamieson Place 38-storey, 890,000 square foot, $300-million office tower at the corner of 4th Avenue and 2nd Street S.W. The building is already 56 per cent leased and is scheduled for completion in late 2009.
"One of the things that's allowed us as well as other developers to continue with the development programs of course is the fact that rental rates have increased at a similar rate . . . My belief is that construction costs will continue to increase but not at the same rate."
"What results in whether or not construction will continue is supply and demand. If the demand is still there, rental rates will probably increase to cover off the additional costs in construction," said Magnussen. Statistics Canada reported that Calgary had the largest increase in non-residential building construction costs of 18.8 per cent in the past year followed by Edmonton (16.6 per cent), Vancouver (12.9 per cent), Toronto (6.8 per cent), Ottawa and Gatineau, Que. (6.4 per cent), Halifax (4.9 per cent) and Montreal (3.2 per cent). Calgary led the country with a 5.9 per cent increase from the third quarter followed by Edmonton (5.5 per cent) and Vancouver (four per cent).
RealNet Canada on Tuesday said the desire to own, whether as an investment or as a place to operate a business, reached new heights in Calgary in 2006. The largest ticket item, office properties, was the biggest contributor to the total volume with $975 million in sales over 50 transactions or 28 per cent of the annual total. Industrial and apartment sales saw the sharpest increases in sales levels of 104 per cent and 192 per cent respectively. RealNet Canada's Q4 2006 Calgary Statistics Report for property sales with a minimum sale price of $1 million said, "insatiable investor appetite" set a new benchmark high for sales.
"Calgary has led the way in terms of economic growth in Canada in 2006, so the high levels of interest in commercial real estate in the city is hardly surprising," said George Carras, president of RealNet Canada. Joseph Barnicke wrote in the Global Views report, "the pessimists who believed 2006 might have troubled times missed out once again. 2006 will go down as one of the best in the past decade, and there is nothing on the horizon that would suggest 2007 will not be another good year for the commercial real estate industry." "There are, however, two key ingredients in our economic assumption that could be troubling," he wrote. "There is the over supply of dollars for investment in real estate and construction costs are escalating, in some areas up 30 per cent. These two factors are bound to have some effect on real estate investment. If construction costs rise to a point where market rents cannot justify building, there will be added pressure on existing properties as demand for investment property continues to outpace supply in all asset classes. Supply of available investment property in Canada is limited."
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Calgary's Commercial Real Estate Market in Focus
Asset Type - 2005 Volume - 2006 Volume - % Change
Office - $1,078.9M - $975.2M - -9%
Retail - $404.7M - $584.1M - 44%
industrial - $223.9M - $456 - 104%
Apartment - $186.5M - $555.2M - 192%
Hotel - $49.3M - $66.9M - 41%
I.C.I.* Land - $352.1M - $394M - 12%
RES. Land - $308.5M - $457.5M - 48%
Total - $2,603.9M - $3,488.8M - 34%
* Industrial Commercial Institutional
Source: RealNet Canada Inc.
This story features a factbox "Calgary's Commercial Real Estate Market in Focus".
© The Calgary Herald 2007
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