The Alberta Economic SWOT (silent W and T)
Source: Invest Alberta
I’ve discussed at length the migration of industrial occupiers and capital investment into the Alberta market over the past 18 months due to the convergence of peak levels of demand, affordable development land, available warehouse space and unsustainable pricing in other major Canadian markets.
See: Where has all the distribution space gone, Alberta?
See: Just in Time Manufacturing is Running Late
This momentum across the province has sustained throughout 2022 with some minor hesitancy due to the many macroeconomic factors that are inevitably affecting industry, politics and economic confidence. As an industrial real estate broker, I get asked frequently if I’m seeing any slowdown in the industrial market due to increasing interest rates, inflation and lingering supply chain struggles. I’ll outline here why these local and global issues are having a much diluted effect on Alberta.
ISSUE #1 - ENERGY PRICES
ALBERTA ADVANTAGE: I’ll begin by addressing the major global issue of energy independence, availability, and ultimately affordability. Without getting too political, there has been an upheaval in the energy sphere over the past six months that has many countries reevaluating the timeframes for which they can feasibly transition off of oil and gas, and reconsidering the importance of energy self-sufficiency to maintain a more balanced weighting of power. As gas prices have increased around the world to fill a car, heat a home, or in agricultural (aka food) operations, the moral questions of affordability vs sustainability have come to the forefront. Two outcomes:
The appetite has increased for ethically and greenly produced Canadian oil and gas products - see Canadian oil and gas production is among the greenest and most environmentally innovative in the world. So why are we not branding it this way?.
The appetite for further exploration and development into the nuclear sector has also drastically increased - see The big energy problem, and the [nu]clear solution.
While there is uncertainty and concern around the world, our energy sector, skilled trades, and natural resources have become a silver lining for the production and supporting services related to energy development in Alberta. While energy prices remain volatile and high globally, business is booming across Alberta creating opportunities to become an alternate, green provider of oil and gas to countries in dire need around the world, with no signs of slowdown in global consumption.
Source: U.S Energy Information Administration, Short-Term Energy Outlook, July 2022
ISSUE #2 - INTEREST RATES
ALBERTA ADVANTAGE: There is a lot of concern in the news about the rapid increases in interest rates across Canada and the negative effects this is having, and will have, on the Canadian real estate markets. Many Canadians that purchased residential assets in the past couple years bought at market peak, but the interest rates were almost non-existent. The recent rapid implementation of rate increases have put Canada’s prime rate at 4.70% (2.50% BOC overnight rate) as of August 2022, up from a prime rate of 2.45% (0.25% BOC overnight rate) YOY in August 2021. Of more potential concern is the mortgages that are variable, or that are rolling over from recent lows to the new rates. My experience in the industrial sector is that, while some newer businesses are walking away from purchases due to the increasing rates, more established businesses are maintaining their pursuits for opportunities in the market because we are still after all, at historical lows (see below chart). Furthermore, there is an economic engine chugging forward in the province’s energy sectors, giving related businesses new growth projections. In retrospect, the past decade was a golden ticket turn of events that doesn’t come around often, presenting unique opportunities to acquire real estate with cheap debt, but ultimately was not sustainable in the long run to achieve a balanced market.
Source: WOWA.ca
Even with a 2.25% increase within a year span, Alberta still presents a compelling investment story in both commercial and residential real estate. Our major and secondary markets offer serviced, subdivided and industrial zoned land at affordable prices, and while the existing supply has been greatly absorbed over the past 18 months, there are still options for user groups in the market.
Quick Alberta Real Estate Facts:
Average Industrial Land Prices: Alberta (Calgary & Edmonton) land prices are ranging from $550,000 - $650,000 per acre in the periphery, and $750,000 - $1,000,000 per acre within the City
Comparatively, Toronto (GTA) is coming in at $3.5 - $5.0 Million per acre, and Vancouver is selling at a whopping $7 Million per acre for industrial land.
Average Industrial Building Prices: Edmonton and Calgary vary slightly, with Edmonton (~4.5% Vacancy) hovering around $150 - $170 PSF depending on building type, and Calgary (~2.5% Vacancy) closer to $200 PSF - still affordable for users.
Comparatively, Toronto (GTA) averages $350 PSF, and Vancouver averages $600 PSF (north of $750 PSF for strata projects in Richmond).
Average Residential Home Prices: The average sold price of a home in the Greater Edmonton Area was $404,168 for July 2022 and in the Greater Calgary Area was $491,392 for July 2022.
Comparatively, the average home price in Toronto (GTA) is $1,373,325 (June 2022) and in Vancouver is $1,273,665 (June 2022)
The correlation between the residential market and the industrial market is best seen in the labour shortages facing nearly all businesses. If people can’t afford to live, they will move to a province that can grant them opportunities and lifestyle improvements. Alberta has continued to see elevated inbound migration numbers, which leads to a growing labour force enabling the province’s industry to continue its growth trajectory. These affordability quotients make the increasing interest rates less detrimental in Alberta.
ISSUE #3 - CONSTRUCTION & SUPPLY
ALBERTA ADVANTAGE: Lastly, the costs to construct and the delays in supply continue to be an issue for all builders across the board. This is ultimately a broad macro problem that can’t be solved within our borders until we decide nationally that Canadian and North American manufacturing is a priority. In the meantime, construction costs, due to inflationary pressures and supply issues, have increased on average 30% (with some items individually increasing much more than that). Some items have extraordinary lead times, which, for new industrial builds, has lead to construction timelines increasing to 18 months from design to possession. Alberta is not an outlier in this problem, but we do have an excellent manufacturing base within the province, comparatively speaking, and when taking into account our active economy, development is still bullish within the province. Many contractors I’ve spoken to have said they are fully booked until summer of 2023 already, specifically for warehousing projects. Edmonton currently has 5.4 million SF of industrial development under construction (2.9 million SF being the Amazon facility in Acheson), with over 75% spoken for. Strong demand, unemployment at 7-year lows and housing starts at 7-year highs will continue to push our province’s economy forward, despite macroeconomic issues.