Edmonton Industrial Construction to Spur Economic Growth

The tide has turned for the Edmonton economy, with energy prices climbing and a wave of distribution companies looking to set up shop there. But additional successes could be at risk.

Edmonton saw a remarkable 2.1 million sq. ft. of industrial space leased in the fourth quarter of 2021, the most industrial leasing since the third quarter of 2013. The challenge stems from the fact that the amount of new industrial space completed in 2021 fell 48.5% from 2019, Edmonton’s first year-over-year decline since 2017.

Without more industrial supply, the Edmonton Metropolitan Region could see its economic growth constrained and further industrial rent increases – a challenging situation that exists in most other Canadian cities right now.

Developers and investors are stepping up to the plate. A record 4.9 million sq. ft. of industrial projects are currently under construction, but the growing supply-demand imbalance has already sent the industrial vacancy rate to a five-year low of 4.2% and declining, while rental rates are steadily increasing for planned industrial developments.

“Some of the biggest logistics companies in the world are looking at locating in Edmonton, but we need to move faster, build more and capitalize on this opportunity,” says Dave Young, Managing Director for CBRE in Edmonton.

Supersized Industrial Demand

The size of the average industrial user continues to increase as ecommerce take-up explodes. Canada had lagged behind global peers in terms of ecommerce adoption, but since the pandemic, ecommerce penetration has nearly doubled, from 10% in 2019 to 19.6% today. Canada is now on par with the U.S. for ecommerce penetration and our industrial markets are struggling to keep up.

In Edmonton, sales of industrial buildings larger than 50,000 sq. ft. more than tripled in 2021, from six transactions in 2020 to 22. Edmonton Metropolitan Region only has three warehouse facilities available immediately larger than 100,000 sq. ft. currently available, which limits the number of options for tenants in the market, not to mention that 73.3% of the new industrial space under construction has already been preleased.

“You might look at the 4.9 million square feet of industrial space under construction in Edmonton and think that’s a sufficient  amount, but it’s mostly preleased,” says Braylon Klemchuk, Senior Sales Associate with CBRE. “We have new and existing logistics users that need significantly more space than we’re currently building.”

This is one of the reasons that Panattoni Development Company is building the first speculative industrial building in the region larger than 500,000 sq. ft. Located at Apex Business Park, the building is scheduled for completion in the third quarter of 2022. Buildings of this scale are common in Toronto and Vancouver, but this project represents the dawn of a new era for the Edmonton industrial market.

“Edmonton has had a fairly balanced industrial market since 2008, but now we’re at an inflection point,” says Mark Edwards, Development Manager at Panattoni. “The marketplace has been building for that established trendline, not for the additional 700,000 square feet of annual demand that has suddenly been added to an already active market. It may take time to recalibrate, but we’re excited by the opportunities in Edmonton.”

Repeating History

In 2021, CBRE predicted that Canada’s major industrial markets could run out of quality logistics and distribution space by year’s end. That unthinkable possibility became a reality sooner than anticipated.

In Vancouver, the industrial availability rate in the fourth quarter of 2021 was 0.9%, the lowest it’s ever been. It’s the same situation in Toronto, where industrial availability is also 0.9%.

Both cities have historically significant amounts of construction taking place – nearly 10 million square feet each – but with over 90% of that new space already pre-leased, rental rates and sale prices are pushing to record levels as demand outstrips supply.

"Users in markets such as Vancouver and Toronto have turned to Edmonton for more palatable lease rates and immediate availability of product," says Klemchuk. "If we don’t adjust to demand and start building more, we could find ourselves in a similar supply constrained, high-cost situation as other markets in Canada."

If You Build It…

Unlike other cities in Canada, Edmonton still has the chance to ramp up construction and capture demand from other markets. QuadReal Property Group is trying to create opportunities with their development at Anthony Henday Business Park.

“We are encouraged by the sustained demand we have experienced in the Edmonton market and our recent lease up of over one million square feet,” says Meghan Kinney, Vice President, Leasing at QuadReal. “As tenants seek lower cost alternatives to Toronto and Vancouver, the Edmonton Region is uniquely positioned to capitalize on this activity with an environment well-suited for developers looking to deliver on new product in the next few years.”

Crestpoint Real Estate Investments is also looking to be part of the solution, having purchased Northport Business Park in February 2021. Northport is an 845,856 sq. ft. Class A industrial development, but the real potential lies in the 42.77 acres of future development land that surround it. They are moving forward with two speculative buildings: 113,000 sq. ft. on the front parcel and 205,000 sq. ft. on the back parcel.

Even with land at the ready, adding new supply is more complicated than simply flicking a switch.

“Every developer out there is looking to step up, but there are a lot of factors at play right now that make construction challenging,” says Dan Viner, Manager, Acquisitions & Assets for Crestpoint. “We’ve got supply chain issues delaying steel delivery by eight months and other building components arrive out of sync, plus prices are climbing. It’s a tough environment to underwrite and execute in, but inflation rent growth are helping to offset some of the challenges.”

Permitting Process is Key

One factor working in Edmonton’s favour is a faster permitting process than other major markets.

Development permits and approvals take months or years in many cities, but it’s broadly accepted that Edmonton has some of the fastest approval times in the country – an advantage that could help the city ramp up construction and maintain its industrial momentum.

“The goal isn’t to have the lowest vacancy rates and highest rental rates in the country. The goal is to have enough of the right type of industrial space to capture opportunities, grow our economy, add jobs and serve consumers,” says Young.

“We can look elsewhere for the cautionary tale, but what really matters is that we have the solution in hand here in Edmonton. We have available land, quick permitting times and developers ready to step up. That’s good news for Edmonton and potentially for online shoppers right across the country.” 

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