Relentless demand for industrial space in Vancouver has pushed the vacancy rate to yet another record low. At just 0.5 per cent, this year marks the first time vacancy has plunged below 1 per cent, according to a new report by Colliers.
The constrained supply has, in turn, pushed lease rates and land pricing to record highs throughout Metro Vancouver, states Colliers’s Q3 National Snapshot, released last month.
The average industrial-space lease rate has hit $15.50 a square foot, up 16 per cent from last year. The average price for industrial strata has also hit a record, at $429 a square foot, nearly twice the price of 2016.
The unprecedented, low vacancy rate – fuelled by a shortage of land and a surging need for warehouses to hold online shopping orders – coupled with soaring rents, is pushing businesses out of the market, analysts say.
“We are facing a real crisis and losing new and existing businesses that deserve to expand in B.C.,” Doug Pulver, executive managing director at Colliers Vancouver, says in a statement accompanying the report. “Some are moving to Alberta. And some Ontario companies looking to expand their footprint in B.C. are now having second thoughts.”
Private equity firm Krystal Growth Partners has investments in nine companies based in the Lower Mainland, where most lease rates have doubled in five years.
“It certainly impacts our profitability and the ability to compete internationally,” says Terry Holland, Krystal managing partner. “It gets tougher and tougher. But the big challenge is expansion. Between the lack of availability and the cost, you think, ‘maybe I can’t expand in the Lower Mainland. I have to go somewhere else.’ ”
Two of the firm’s companies curtailed expansion plans this year because no suitable space could be found. “So, the opportunities for new investment here get lost,” Mr. Holland says.
While every size and type of industrial space is undersupplied, large logistics sites – such as those required by Amazon (which has scooped up more than 1.1 million square feet of Metro Vancouver’s industrial space) and other large distribution companies – are now virtually non-existent, says Ryan Kerr, principal at Avison Young’s Vancouver office.
As a result, Vancouver has lost several “key deals” over the years, Mr. Kerr says. Western Canada distribution centres for Home Depot, Walmart, Cisco, Canadian Tire, FedEx and, most recently, the 1.2-million-square-foot Lowes centre have been built in Alberta.
“I think you’re going to see more potential B.C. business go elsewhere,” he says.
The scenario, he adds, could be that “product goes from Vancouver’s port to Calgary, gets unpacked and sorted, and then [for some of the cargo] gets transported back to Vancouver,” to be delivered to end users and points of sale.
That extra, 974-kilometre transport cost still makes Calgary about 30 per cent less expensive for large companies to run Western Canadian distribution operations, according to an extensive 2018 supply chain comparison, by Triskele Logistics for the City of Calgary.
What Vancouver-based companies save in transportation, they lose mostly in real estate prices, according to the report.
With more businesses moving to Calgary, the city also hit a record low vacancy rate of 4.6 per cent, an annual drop of 69 per cent – the steepest plunge this year, by far, of any Canadian city.
But Calgary has space to build more industrial buildings in outer regions. Vancouver, bounded by mountains, water and protected lands, “is anticipated to absorb the last of its effective supply sometime between 2028 and 2035,” according to Metro Vancouver’s 2020 Regional Industrial Lands Strategy report.
“With a limited supply remaining, there are fewer opportunities to accommodate both new industrial businesses and those businesses that are seeking to expand their operations,” the report states.
“This, in turn threatens the economic diversity and vitality of the broader regional economy.”
To increase supply, the report encourages increasing density with zoning approvals for multistorey industrial sites. Among the more than one dozen stacked industrial builds set for Vancouver is Wesbild’s Marine Landing – a six-storey, 340,000-square-foot complex, said to be the largest stacked project in Canada.
The ground floor includes 50,000 square feet of logistics space. The second to the fourth levels will accommodate media production, design studios and medical technological labs. The top two levels of office space will be built using mass timber.
While mixed-use is common in multistorey formats, Oxford Properties Group is developing Canada’s first large-scale, full-industrial stacked building.
The 270,000-square-foot upper level of the building is engineered to bear the weight of fully loaded transport trucks, states the news release, which notes the entire Burnaby-based building offers 707,000 square feet of industrial space.
When completed in 2022, it will be the largest available industrial property in the Greater Vancouver Area.
The two projects are indictive of ways the region’s developers have become highly skilled at finding creative ways around the land crunch, municipal red tape, rising construction material costs and other challenges, Mr. Kerr says.
Nearly six million square feet of industrial space is currently in development stages in Metro Vancouver, according to reports. Net completions have shot up by about one million square feet a year for the past five years.
Investors are confident the development pipeline will do little to ease lease and land prices. In the first half of 2021, “industrial investment of $1.1-billion blew past all previous industrial investment records,” a new CBRE report states.
“Given the current extreme shortage of available industrial space and inability to oversupply the market with new supply, we anticipate a continuation of [investment growth] in the near term,” says Jason Kiselbach, senior vice-president of CBRE Vancouver.
Mr. Pulver, at Colliers, agrees – with a caveat. “If you’re an investor, you’d be very optimistic. But at the same time, you’d be concerned that, ‘will my tenant be able to continue to pay the rent? Do I have any risk of tenants defaulting?’
“And then I’d be concerned about losing great business and great tenants to other markets.”