A new Amazon distribution centre, a multi-level facility in Metro Vancouver. It’s one example of industrial buildings in the city which are largely pre-leased before even being fully constructed. (Courtesy Avison Young)

Metro Vancouver’s industrial market continues to set records as the most expensive in Canada, with six consecutive quarters of the nation’s most constrained supply. The ultra-tight market meant a 0.5 per cent vacancy and a record-setting average industrial lease rate of $18.09 per square foot in Q1 2022.

The lease rate is up 30 per cent over the same quarter in 2021, according to the Avison Young Spring 2022 Industrial Overview Report for Metro Vancouver, a six-month review which looks back at the market since fall 2021.

Michael Farrell, Avison Young principal, said that constrained supply — as well as interest rate hikes that arrived sooner than expected — are the big takeaways for him.

“I think the big item is interest rates — obviously the rate-hiking cycle started a little sooner than everyone was expecting. We were telegraphing mid-2022 to mid-2023 and it started sooner. It will be interesting to see how high the rates go, how fast they go and their impact on prices.

“I know that hasn’t played out in the transactions listed in (the report) because it’s backward-looking. But for me, the big thing in this report is that interest rates are going up and what impact that will have.

“I’m not an economist, but I think it takes at least six months for these higher interest rates to start biting.”

Interest rate impact to be delayed

The true impact won’t start to shift the market for about a year, said Farrell.

“I think that in 12 to 18 months we will maybe see a different market. We call a balanced market between landlords and tenants in the seven to eight per cent vacancy range and we have 0.5 per cent vacancy on 216 million square feet of inventory.

“Could we see large amounts coming back onto the market and it softening? Yes. But we still have a long way to go to even get to a balanced market. I think that would play out in 12 to 18 months.”

Amazon topped the acquisitions of the past six months with its purchase of 12.45 acres at 86 S.E. Marine Dr. and 168 S.E. Marine Dr. in Vancouver at $12,047,225 per acre, paying vendor Hungerford Properties close to $150 million.

Beedie also made a couple of big purchases, both in Delta, including $117 million for a 22.6-acre site on 80th Street.

“(Amazon) said recently they probably have more warehouse space than they need because they have been acquiring warehouses at an absolute breakneck pace,” said Farrell.

“But e-commerce sales have declined for the first time . . . so I don’t think that Amazon will continue to acquire warehousing at the same pace it had previously, which is good for the market because they are almost crowding out other tenants by taking up so much of the new supply.”

Wayfair topped the list of notable lease transactions since the fall of 2021, with its lease of 504,400 square feet of warehouse space in Richmond. That was followed by a not-yet-disclosed transaction for nearly 430,000 square feet of space in Surrey.

“I would say Wayfair is big for Vancouver,” said Farrell.

Large-scale tenants improvising

Large-scale tenants would lease even more space if it were available, Farrell noted. There are big users who’d like one million square feet in Metro Vancouver but are having to divide warehousing and lease extra space in Calgary in order to serve the Vancouver region.

“Because of a shortage of space, shipping containers are loaded at the Port of Vancouver and shipped by train to Calgary. Merchandise is unpacked in a warehouse and returned to Vancouver by truck. That requires leased space on both sides of the Rockies, an inefficient and potentially risky situation.

“That’s fine and dandy until a major storm comes through and knocks out the highways and the railway between us and Alberta,” said Farrell.

“Not many people think about industrial, but in the last couple of years talk about the supply chain and resilience in the supply chain is a big issue. We should be building more warehousing.”

As for the strata market, it had seen aggressive prices that weren’t sustainable so everyone is expecting those prices to flatten, he said.

About 2.8 million square feet of new industrial space comes on line in the next six months — and 85 per cent of it has been pre-leased or pre-sold, according to the report.

Farrell said it’s an ongoing theme of the reports, that supply remains extremely constrained. The low vacancy rate isn’t expected to change.

Some businesses will look to secondary and tertiary markets outside Metro Vancouver; others will be forced to leave the province. For that reason, even interest rates shouldn’t put too big a dent on market prices, said the report.

Vancouver supply restraints to continue

In the next few months, there will be announcements about new developments, but not enough to satiate demand.

“The supply constraints will continue to impact the overall Metro Vancouver industrial market in a big way . . . leasing demand will continue to outpace supply by a wide margin as rent increases continue to accelerate,” the report said.

Investors are extremely bullish on the region, with more than $605 million worth of investment recorded in the first quarter — representing a 25 per cent increase over the same time last year. Foreign investors will likely continue to move into the commercial market due in part to restrictions around residential ownership, said the report.

“It’s a global force, the increased demand for warehousing space,” Farrell said, “and how that’s playing out in Vancouver is always a relatively under-supplied market. And when you have super-charged demand like what you see, you get skyrocketing prices and very low vacancy.

“We’ve been building four to five million square feet for the past several years and every year it’s full subscribed.

“There is a finite supply of industrial land. The City of Surrey did just expand their (South) Campbell Heights business park and added several hundred acres, but at the end of the day that won’t make a material difference.”