The Vancouver industrial real estate market continues to set all-time records. New data from Colliers shows three consecutive quarters of record-low vacancy; five quarters of zero vacancy for properties over 100,000 square feet; and a second straight quarter of no vacant spaces larger than 50,000 square feet.
“Despite new construction of 37 million square feet of industrial space over the past 10 years . . . vacant inventory has decreased to just over one million square feet or a 0.5 per cent vacancy rate,” said Chris Brewster, VP, industrial for Colliers, during a discussion at the recent 2021 Vancouver Real Estate Strategy & Leasing Conference.
There is about 6.1 million square feet of space currently under construction in the Vancouver area market which has a total inventory of 216.3 million square feet.
“Not surprisingly, lease rates have grown considerably over this time. Ten years ago, the weighted average asking rent in Vancouver was $7.44 per square foot. In Q3 2021, that number has swelled to $15.50 per square foot.
“For the four-year period 2011-2015, there’s effectively no growth in lease rates in this market. It averaged around $8 a square foot. It jumped up in 2016.
“We started to see some growth there with a 9.7 per cent compound annual growth rate in rental rates and then the boom in the last three years as we’ve seen an increase with a compound annual growth rate of 11.5 per cent.”
Roadblocks in development process
Brewster said the upward pressure on lease rates is the market’s dominant issue. Quite simply, there’s huge demand chasing very limited supply.
Jon Leugner, director of leasing for Hungerford Properties, said it’s no surprise developers have not been able to keep pace.
“Our pace of development year-over-year from 2011 to 2021 was 2.3 per cent and there’s only a couple of years where we delivered more than 2.5 per cent in the market,” he explained.
“Those were the result of some larger greenfield sites and land-use policies changing in a few key markets of the Valley.
“The demand cycle of industrial space is shorter than our development cycle, unfortunately. E-commerce and that demand for e-commerce as a percentage of retail sales has made it so that there’s a lot of demand,” Leugner continued.
“We just can’t keep up when infill sites are taking at least 24 to 36 months to develop and four to five years for greenfield sites, depending on the complexity to be brought to market.”
Developers say land-use policies and the municipal processes throughout Metro Vancouver lead to these extended timelines.
“We live in a very complicated jurisdictional environment. Metro Vancouver has more than 23 different jurisdictions, 30 when you count the Fraser Valley now that we have to be tapping into those industrial lands,” Leugner said.
“When you add up all those person-hours and just the development personnel that are required to be able to do that, build all those relationships with all those municipalities and everyone that’s there, plus you have a regulatory environment that’s very complicated and very robust . . . it makes it no surprise.”
Municipalities are also facing labour shortages which mean fewer staff to deal with the flood of applications.
“There is light at the end of the tunnel in all this. There’s the task force for development application and permitting modernization at the City of Vancouver that’s going to hopefully address a number of different issues at the development-permit level,” he said.
6.1 million square feet under construction
The rising rental rates begs the question of whether they are sustainable over the medium to long terms.
Irene Au, director, leasing for QuadReal, said the firm is empathetic to tenants when leases are renewed. Current rates are usually double what they’ve been paying, which raises eyebrows because profits for these companies have certainly not doubled in the past few years.
“Our best approach usually is for them to go out to market and get educated . . . to know what we’re saying is not out of line. Whether it’s sustainable or not, I think a lot of the times this cost ends up going as a flow through to the end user, being us consumers,” she said.
“So the products that they are selling or producing just gets more expensive and I think we’ve all seen that over the last couple of years. Unfortunately that’s the end result of whether that’s sustainable or not.”
Another challenge is that a portion of the inventory in the market is aging, so maintenance costs will increase.
“The cost is really no different than the cost of living. That continues to increase significantly as does the occupancy costs within any industrial or really any asset class.
“. . . People are just going to have to find leaner ways to try to either be more profitable or just have a small profit margin. I think that will end up being what reality turns into,” Au surmised.
No change for foreseeable future
In an interview with RENX following the conference, Brewster said some businesses may be choosing to move a portion of their operations as far away as Calgary, for example, because of the lack of space in Vancouver and the elevated rents.
However, it’s not happening on a big scale.
“The uniqueness of this market (Vancouver) being a port city and a lot of people who just like living here, it has a stickiness to it,” said Brewster.
And what of the Vancouver industrial real estate market prospects through Q4 and into 2022? More of the same . . .
“There’s a lot of pent-up demand in this market. . . . If you have an existing building of really any size right now, it’s going to lease,” he said.
“Most of the leasing that’s happening right now is on future buildings – buildings that are going to deliver in late 2022 or early 2023, because that’s the only product that there is,” he said.