Winnipeg’s commercial real estate market — momentum going forward into the year

WinnipegREALTORS® Commercial Division chair Tom Derrett’s message was prepare for “tempered optimism” in 2010.
Derrett, of Colliers International, provided an overview and summary of Winnipeg’s commercial real estate sector activity during the WinnipegREALTORS® annual forecast breakfast. 
He said there is a lot of momentum going forward, but some variables that may stand in the way of new developments. 
According to Derrett, three signature projects are the new airport, the Canadian Museum for Human Rights and the IKEA site in southwest Winnipeg.
Last year shaped up well for the local commercial real estate market, especially in comparison to the global marketplace. Local sales were the second best in history at $545 million. The best year was 2007 with $762 million in sales. 
Four major property sales made up over half of the total amount of sales in 2010, including GEM Equities’ high-rise apartment portfolio, Winnipeg Square and Commodity Exchange Tower, St. Vital Square & Pembina Village and the Canada Post Building on Graham Avenue.
Derrett said some of the local market’s  strengths included low unemployment, a diversified and stable economy, the low cost of living and being not as overdeveloped as some other markets. Low vacancies are part of the mix, too, with strong leasing in industrial and retail and fairly steady office conversions. 
But, Derrett also said there is a lack of available product in all commercial categories. Another barrier is high construction costs leading to very little new development. Finally, given economic uncertainty as a result of global economic challenges stemming and carrying over from 2009, there is reluctance by national and global tenants to commit and make decisions with respect to real estate. 
He said the retail sector surpassed the three previous years due to a few large deals. Office outperformed 2009 and industrial fell back as a result of a dearth of product. 
The apartment category continues to do well as investors look for stable yields in a stable market. One vote of confidence was Timbercreek Asset Management’s investmnt of $100 million in three apartment properties.
Besides recapping 2010 commercial activity, Derrett highlighted the resounding success of Winnipeg’s first Commercial Real Estate Forum that attracted 500 attendees, including major players from across the country. The forum exceeded expectations and showed increased interest from out-of-towners in the local commercial marketplace.
In 2011, Derrett predicts the lowest rental apartment vacancy rates in Canada and high levels of immigration will lead to institutional investors looking to purchase high-quality investment grade properties to fill out their portfolios. CMHC-insured debt financing at attractive rates is also available. 
The big question will be what will come on to the market for sale. Derrett referred to a number of the apartment buildings being acquired for condo conversions, as the return on this investment is more coveted than the cash flow from retaining apartments as rental units.
His recap of industrial indicates a gradual slide upward in rental rates with low vacancy rates being held in check due to little new construction. The reluctant expansion in 2010 meant many lease renewals. The rates of $5.25 a square foot will have to increase to motivate developers to build new industrial space. There is also a lack of serviced industrial land. 
Phase 2 of the Sterling Lyon Parkway is well underway and Centre Port Lands is starting to get some traction as a result of the $212 infrastructure to create the inland port.
In Derrett’s view, the office sector will be flat with few new transactions. Winnipeg is challenged because of its lack of head offices, so there tends to be more shuffling of space than demand for new space. 
High construction costs are even more pronounced in office buildings which is a real obstacle to getting deals done. As a result, tenant deals will go from five to 10 years in order to amortize tenant improvements at a more affordable rate. 
The impact of the new Manitoba Hydro tower downtown has created more office options in southwest Winnipeg. There also should be some good opportunities for tenants in the downtown Class A market. 
Derrett said the 71,000-square-foot Sterling Lyon Health Centre, which will be ready by the late spring, is 40 per cent leased. 
There was no real fallout in retail relative to other markets as a result of the recession, he added. Bankruptcies and closures were kept to a minimum. Due to minimal construction, lease activity was extremely strong. One of the biggest retail deals of the year was the Artis REIT acquisition of St. Vital Square and Pembina Village. 
This year will see the construction of the IKEA site and on neighbourhood infill opportunities, such as 86,000-square-foot River East Plaza. Derrett said Target’s takeover of Zellers will create opportunities and/or movement in 2012 and 2013. There are other large U.S. retailers looking north to Winnipeg with Lowes actively seeking local land.
Derrett said the old Winnipeg Arena land will kick-off development with the appearance in the city of T&T Foods, an Asian supermarket owned by Loblaws. This year, and 2012, should see more commitments from anchor tenants with substantially more activity next year.
Derrett left the 300 in attendance with a number of ifs to ponder: “If market fundamentals continue to be strong, if we start getting consistent population growth, and if we become more entrepreneurially oriented, there could be some very good things happening in our backyard.”