Industrial inventory in Vancouver is so constrained that would-be tenants are fleeing the city for Calgary, where there’s an abundance of cheaper supply and developable land.
“What those companies have done is calculate the cost of rent in Calgary and the cost of transportation to move out to here is worth it,” said Brennan Yadlowski, a commercial mortgage broker with Avison Young. "Rents are a third or a quarter of what they would be for industrial in Vancouver and you make up for those extra transportation costs by having much cheaper rent. That wave has already started for sure.”
The exodus began roughly eight to 12 months ago, he added, which is when the industrial vacancy rate in Calgary began falling below 5%, and it hasn’t slowed down since. This isn’t the least bit surprising, considering there’s hardly any availability in the Vancouver’s built market, nor is there any land left that’s zoned for new industrial. The only options are redevelopment, becoming creative, not to mention innovative, or exploring agricultural lands, most of which are protected, in the greater metropolitan area.
Susan Thompson, Associate Director of Research at Colliers, notes that Vancouver’s industrial vacancy rate is 0.4% while Calgary’s is 3.5%, the latter dropping from 5% at the beginning of 2021. That, Thompson says, is an inordinately rapid decrease, adding that rental rates in Calgary are much cheaper since Alberta has a plethora of developable land. Rents in Vancouver are over $16 per sq. ft, but only $7-9 in Calgary, and the savings are such that it offsets companies’ transportation outlays.
It is so difficult to find vacant inventory in Vancouver, where all the major players are vying against each other for the same space, that many plan their moves up to three years in advance.
“Rental rates are half of what they are in the Vancouver area, and that offsets transportation costs, whether they’re looking at truck, rail or air,” Thompson said. “Calgary is classified as an inland port, so companies say, ‘We’ll take it off ships in Vancouver, bring it to Calgary and break it down, and treat that as our distribution location for Western Canada,’ so they’re really trying to look through the calculus of what’s available, what the rental rates are, and what are the increased costs of transportation will be, and in some cases they’re making that decision.”
Like Moths to a Flame
Calgary is an obvious choice for industrial tenants, especially those specializing in last mile delivery, to relocate because the city’s economy isn’t just on the mend -- it’s on fire. After lean years following the oil and gas sector’s plummet, Calgary quietly diversified its economy, and in tandem with the energy sector’s rebound, a burgeoning tech industry has renewed interest downtown.
According to RE/MAX’s 2022 Commercial Real Estate Report, $2.4B was invested in Calgary’s commercial sector last year, a 26% year-over-year increase from $1.9B in 2020, and nearly $1B was invested through the quarter of 2022. With economic prospects once again propitious, consumer spending is up.
“Interest rates were low until Q1 of this year and consumer spending is up, and that correlates to distribution centres being busy and there being a need for more distribution centres in the Calgary area,” Yadlowski said.
Industrial isn’t the only commercial sector riding high these days. Calgary’s multi-residential sector is replete with new building, and even then, there’s downward pressure on the vacancy rate, which the Canada Mortgage and Housing Corporation pegged at 5.1% in October.
Of all major cities in Canada last year, Calgary had the highest average salary at $69,499, which increased by 0.8% from the year prior, according to Conference Board of Canada statistics. By contrast, Toronto and Vancouver, Canada’s two most expensive cities, last year had average salaries of $61,747 and $51,894, respectively.
Yadlowski says that extends to Calgary’s pool of renters.
“The purpose-built rental vacancy rate in downtown is a little higher with new product coming on, but the overall vacancy rate in Calgary is around 5.1% with downward pressure,” Yadlowski said. “The vacancy rate is being pushed down and rental rates are pushing up, which are two strong indicators that that asset class is in a good place. We’re seeing vacancy rates specifically being pushed down across the suburban and core areas, and rental rates for new purpose-built rentals are up as well. The nice thing about that is the median renter income is so strong that there’s some room for us to take on those higher rental rates.”