Investor activity in Vancouver’s industrial real estate market might appear muted, however, that’s only because of acute supply scarcity.
But those lucky enough to get in are reaping the rewards.
Marine Landing is a mixed-commercial development in south Vancouver that’s predominantly industrial and also has some office units. Brennan Finley, Senior Development Manager at Wesbild, Marine Landing’s developer, says about 30% of pre-sale units were purchased by investors.
“The investor case [that] is there is a supply and demand issue. Urban cores are growing, the population is increasing, and demand for industrial space is increasing due to a lack of supply of it, and getting in and having a piece of that industrial space is attractive,” he says. “When you run leasing rates and you cap them and compare them to the purchase price, there is a 10-year horizon and there’s a time to cash flow and get their money back eventually.”
Industrial investments cash flow very well in Vancouver, a landlocked city with hardly any land zoned for industrial left. As a result, newer developments will only be found in the metropolitan region, typically on agricultural lands that have been rezoned, but not in Vancouver proper, where developers like Wesbild have gotten creative.
Marine Landing is a six-storey stacked strata development with units ranging from 600 to 34,000 sq. ft. Because land is so hard to find, Wesbild is stacking units one on top of the other, which involves, among other things, larger clear heights and wide ramps for transport trucks.
Rental rates for industrial units in Greater Vancouver have reached $16.93 per square foot, but it’s much higher in parts of the urban core.
“Industrial units in Vancouver are definitely cash flow positive, where they carry mortgages. It all depends on location and where it is. You’re seeing some areas in south Vancouver that are getting close to $40 per sq. ft as a rental rate. It does eventually cash flow a couple of years down the line as you’re holding it,” he said.
According to Colliers, the industrial vacancy rate in Greater Vancouver was 0.4% in Q1-2022, and for units that were marketed for lease even though they were still tenanted, it was 2.5%. Susan Thompson, Associate Director of Research at Colliers, says the major reason vacancy is a problem is there’s nowhere to build, prompting developers to think outside the box.
“What we’re seeing a lot of is developers will look for sites with additional development capacity or functionally obsolete buildings to redevelop, and they’re looking for ways to make the sites more efficient, which involve going vertical, so the clear height is higher and that allows companies to put in more racking and automation,” she said, adding that clear heights are 40-ft high.
“They’re better off utilizing what little land we have available.”
Cap rates are compressing in the city’s industrial sector and that is naturally attracting investors, Thompson added.
“Industrial has been one of hottest commodities in Canada for several years now with high demand and low vacancy, because rents keep increasing the valuations keep increasing,” she said. “That is compressing cap rates, but a lot of investors are taking a long-term view of these and they continue to be great assets to invest in.”
Granted, most real estate investors act in accordance with medium- to long-term horizons and, moreover, there’s less flipping in the commercial sector than in residential, but of every segment of the real estate market -- and not just in Vancouver but across Canada -- industrial might have the most constrained supply.
“The constraint is the lack of product. We typically see more transactions on newer and large properties as they’re being developed and fully leased because there’s such limited supply of land and, therefore, development is constrained. There’s just not enough product out there for [investors]; they’re all basically looking at the same buildings because there’s just not enough choice out there,” Thompson said.
“During the most recent quarter, our data suggested the rental rate was just short of $17 per sq. ft, with trending continuing to increase because of scarcity in market.”