In-person events such as the Calgary Stampede, elevated oil prices and increased tourism has returned to Calgary in the first half of 2022, showcasing the resiliency of the city and driving optimism in the retail market, according to a mid-year retail real estate report by CBRE.
“Calgary’s adaptable retailers have been increasing their market share, expanding on concepts, and capitalizing on the returning consumerism. Landlords are diversifying their tenant mixes, back filling vacancies and welcoming new market-entrants and brands to Calgary. However, optimism is marred by rising interest rates, increasing construction costs, supply chain issues, scarcity of certain equipment and delays in permitting and financing,” said the report.
“After two years of challenges for the retail sector grappling with COVID-19, Calgary is back open for unrestricted business. Retail options continue to be in demand as vacancy rates compress for a second consecutive half.”
The report said Calgary’s overall retail vacancy continues its downward trend, dipping 30 bps from 6.2 per cent at mid-year 2021 to a healthier 5.9 per cent for the first half of 2022.
“Net absorption is strong and demand for existing units with any pre-existing infrastructure is on the rise. Developers continue to navigate through the upward pressure on construction/land costs, constrained supplies and permitting delays. For the first time since the second half of 2015, the amount of product under construction is below a million square feet. If inflation and rising costs don’t hinder the progress, we expect the pipeline of new supply and construction numbers to rise over the next half as the residual bottle necks brought on by the pandemic begin to subside,” explained the report.
The areas that experienced the largest half-over-half declines in retail vacancy are Calgary’s East submarket falling 390 bps to 3.8 per cent, the Northwest submarket decreasing 380 bps to 5.5 per cent, and the South submarket declining by 290 bps to 3.7 per cent. The Southeast continues to have the lowest vacancy rate in Calgary, down 70 bps to 2.2 per cent.
“The North Central, East, Southeast and South sectors of the city have an average vacancy rate of 3.6 per cent leading to an increase of pre-leasing activity from the expanding retailers attracted to the development and demand of new homes in these areas. These submarkets account for approximately 90 per cent of suburban home development in Calgary over the next five years. Alternatively, vacancy in the Central Business District (CBD) remains elevated and has increased by another 110 bps to 12.6 per cent this half, inflating Calgary’s overall vacancy average. Historically the CBD suffers from chronically high vacancy rate with a 10-year average of 9.6 per cent,” said CBRE.
“The CBD’s 2022 challenges stem from an increased reliance on hybrid work models and record levels of office vacancy (33.7 per cent in Q2 2022) which continue to negatively impact foot traffic in downtown Calgary. Rental rates for this product continue to compress with higher inducements to attract qualified retailers to the area. Removing CBD vacancy numbers out of the equation, Calgary would be sitting at 4.5 per cent overall vacancy.
“As we saw in H2 2021, new construction pro formas are being revisited and revised to reflect the rising costs associated with development. For some projects the increases have forced holds on development progress until the economics work without forcing unsustainable rents onto their tenants. Pre-leasing pricing for new shell space is marginally increasing but longer fixturing periods and higher inducement packages are being discussed, and in some cases, implemented to meet leasing thresholds to start construction. Significant increases to build-out budgets have tenants trying to find even more ways to reduce costs where they can. To offset initial start up capital requirements, there is an increasing demand for existing space with any pre-existing infrastructure in place, leading to marginal increases in rent and reduced inducements offered for older product with good infrastructure.”
John Moss, Senior Vice President, Retail Leasing and Investment with CBRE, said there’s a lot of activity in the leasing world but you have to break it down by different areas of the city.
“The downtown core is still suffering significantly,” said Moss. Like many downtowns across the country, the shift towards remote work, particularly in the past two years because of the pandemic, has hit retail in those areas very hard.
“But the peripheries, the pedestrian pedways, the Kensingtons, the Bridgelands, the Inglewoods, the Marda Loops, the 4th Streets and the 17th Avenues, those urban places have all seen significant vigour. They’ve come back and they are starting to do exceptionally well. And those pockets that might have been created from COVID are now being leased up.”
He said the suburban markets are strong.
“With Calgary as a whole, the residential growth that we’ve seen through the residential developers is very strong and what always happens with residential growth is the requirement and need for those retail amenities and services,” added Moss.
“So we are going to see and are continuing to see significant suburban and retail construction because the momentum the city is seeing on a net migration, on a residential density and growth, basis. It’s great to see.
“There’s a lot of national and international tenants looking at Calgary because of how robust our economy is showing . . . This city has so much headwind working on its back that I think the city will see a boom that will compete with 2014.”
Moss said a redevelopment of the Eau Claire Market as well as an eventual new hockey arena/event centre in the old Victoria Park neighbourhood, adjacent to Stampede Park, will provide a big boost for downtown retail in the future.
He said the food and beverage sector in Calgary has come back stronger than ever because of the pent-up demand for people to get out of their homes after the two-year pandemic.
Wellness is also a big retail category today.
“Anything that combats and you can’t get from ecommerce has definitely thrived and if there’s an experience attached to it, it’s thriving,” he said.
