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Industrial gridlock: Are Vancouver's space crunch, leasing rates Calgary's gain?

Industrial vacancy in the Metro Vancouver area is finally showing signs of easing toward a more balanced market. This image shows the Campbell Heights area, in Surrey. (Google Maps)
Industrial vacancy in the Metro Vancouver area is finally showing signs of easing toward a more balanced market. This image shows the Campbell Heights area in Surrey. (Google Maps)

Industrial vacancy in Metro Vancouver is starting to expand for the first time in many years with supply slowly catching up to demand — all against a backdrop of economic uncertainty that could pull more competition from the local economy.

Despite the modest increase in availability, it remains a challenge for Vancouver companies to find large-format space and buildings in this market, stakeholders say.

Are companies leaving the West Coast for larger spaces at lower rates in Calgary? Industrial insiders tackled this issue in a recent discussion at the Vancouver Strategy and Leasing Conference. 

The answer is a bit complicated, with consensus a little clouded, various panellists said. Mostly it depends on individual companies because every business is different. 

Vancouver's industrial market continues to perform well against other Canadian and North American markets.

However, “over the last year, we've seen a decline in activity, which increased vacancy and availability," said Irene Au, vice-president, leasing with QuadReal Property Group, who was hosting an industrial panel at the conference.

"With a total inventory of 214 million square feet, we went from 0.5 per cent (vacancy), which is basically zero . . . a year ago, to 2.4 per cent today." 

Au said availability is closer to three per cent and the market is now on a streak of availability ticking up over several quarters. Au noted a balanced market is considered seven to nine per cent. 

More new industrial deliveries pending

Roughly 5.6 million square feet of new industrial inventory has been added to date this year with about 6.8 million square feet under construction, Au said. That means it's possible the Vancouver market is headed closer to normalization.

Asking net rent per square foot has increased from $12.50 in mid-2019 to $21.99 today, according to Avison Young's Q3 2023 Metro Vancouver industrial market report.

That report also noted there are fewer than 10 industrial buildings over 100,000 square feet currently available. Vancouver average asking rental rates are among the highest in the country.

Overall, the experience for tenants has changed, said Bianca Gilbert, an associate vice-president with CBRE in Vancouver. "Last year, if (a tenant) was coming up for renewal, it was basically, 'Here's your renewal rates, take it or leave it, but you can't find anything anywhere else.' " 

Tenants have a bit more time and space today to calculate their next moves. They might finally also have some options, Gilbert said. 

Pete McFetridge, vice-president, leasing with Onni Group, said many tenants have been "right-sizing their businesses" over the past eight months.

An increased level of vacancy has created opportunity for tenants to expand their footprints and find preferable locations with taller ceiling heights and better amenities "rather than feeling forced to stay in the space that they're in.”

During the past four-and-a-half years, Metro Vancouver has lost over five million square feet of industrial land infrastructure development to Calgary, which has resulted in a loss of an estimated 6,300 jobs, according to an economic study on industrial lands in Metro Vancouver prepared for NAIOP Vancouver and the Greater Vancouver Board of Trade by InterVistas Consulting and Urban Systems. 

For every one per cent increase in land available for jobs and production, the study estimates an additional 126,100 jobs are created and $12.2 billion in GDP is generated for B.C.

Calgary provides attractive alternative

The examples of companies shutting down their Vancouver operations and relocating their business to Calgary are few and far between, said panellist Paula Benham-Parker, vice-president, investments with Concert Properties

"What we're seeing more is that people and tenants and companies want to come to Vancouver, but there just isn't the available land supply."

She said about four per cent of Metro Vancouver land is dedicated to industrial space. That's roughly half of the industrial land percentage in Calgary. The cost of construction is about 20 per cent less in Calgary than in Vancouver. 

For some groups considering Vancouver, the lack of available large footprints and high rental rates makes them skip over the market entirely. Some are choosing Calgary.

Moreover, Vancouver’s development cycle is just too long to be able to compete for global organizations looking for massive floorplates within the four-year development range, added panellist Jon Leugner.

“In Vancouver, we're at least a four-to-six year entitlement pathway,” said the senior director of real estate with Hungerford Properties. Sometimes, it can take up to eight years, he added. 

However, Benham-Parker said many tenants in their industrial portfolio service Vancouver Island within a 24-hour period.

“That's not realistic from Calgary," she said. "Real estate only makes up a small fraction of their actual operating expenses.

"It's the transportation costs, and as we've all seen the price of gas and just utilities in general, whether you've got cars or trucks running on electricity, that it's just more expensive."

It's also not always a Vancouver versus Calgary issue, Benham-Parker and others said.

Often companies looking at the Vancouver market are also comparing the market to other port cities along the West Coast like Seattle, Portland, the Bay Area and L.A. Compared to those cities, industrial rents in Vancouver are still relatively affordable. 

The challenges of a long-distance move

Returning to the question of whether a substantial number of businesses are leaving Vancouver for Calgary, Ross Moore, senior vice-president and managing broker with Cresa in Vancouver, said the answer is largely no, except for the margins.

The Port of Vancouver is 900 kilometres from Calgary. That creates a lot of costs and logistical challenges for companies that want to distribute from Alberta, Moore said. 

"Some companies just have to be here," he said. 

However, Moore said circumstances are starting to change. 

A couple of years ago, Moore recalled completing a renewal for a company with 14,000 square feet on Annacis Island in Delta.

The rent doubled for its renewal and at that time the firm discussed relocating to Calgary. Eventually it decided to stay in Vancouver mostly to retain the existing staff.

"I got an email two weeks ago," Moore said. The company is now looking to expand within the next two years to potentially 25,000 square feet. Moore said he told them to expect lease rates of $22-$24 per square foot, "and then radio silence." 

Moore heard the company is now looking at moving to Calgary.

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