Industrial is the hottest asset class in every major Canadian real estate market because demand is vastly outpacing supply while showing nary a sign of deceleration. So, with returns on investments as high as they are, is now the right time to cash out?
“I would say if there is a reason that you’re looking to liquidate assets to raise capital, it’s a very good seller’s market right now,” CBRE Vancouver’s Managing Director Jason Kiselbach said. “There’s huge demand from private and institutional capital for industrial product; it seems like people can’t get enough of it, so you’ll hit high valuation.”
However, Kiselbach added that investors might risk jumping the gun.
“At the same time, there’s a reason people want industrial, and our view on it is there’s still room to grow on rental rate appreciation, values, and yields, for industrial, so if you have to sell, I wouldn’t say it’s to take advantage of the market right now because you’ll never see pricing like this. I think the market is still going to run.”
Keith Reading, Director of Research at Morguard, also believes industrial assets still have room to grow, but he advises that there’s always risk in trying to time the market for an optimal exit. Moreover, he says investors should understand their objectives before entertaining such decisions.
“There’s also a danger in trying to play the timing of markets and how long you hold onto [assets]. There’s still a bit of runway left, for sure,” Reading said. “Depending on your objectives, if you have another asset class you want to put money in -- and it won’t necessarily be real estate; it could be some other asset you think you want to catch at a good time -- it wouldn’t be such a bad idea if you said, ‘I’m going to sell my industrial asset because I’ve made money on it and I want to put that money elsewhere, because how long is that industrial runaway anyway?’”
Reading reckons it could be another year or two, or longer, but there’s another emergent asset class, namely life sciences, which is only beginning to take off in Canada. As Canada tends to lag behind the United States, where life sciences is big business, Reading believes sapient investors would heed it its due.
“We’ve seen the popularity of life sciences real estate lately. A lot of groups are investigating that area,” he said, adding that, in addition to Canada’s aging population, the COVID-19 pandemic has grown the appeal of investing in the sector. “There’s a lot of capital being funnelled into life sciences, so investors are looking at that as a real growth area and thinking maybe they could put money in that type of asset.”
In spite of emergent asset classes, e-commerce, which had already stolen market share from brick and mortar retail in the years preceding the pandemic, is expanding into other industries. For example, grocery delivery wasn’t especially popular before the pandemic, but it’s become just one of seemingly myriad industries that have adopted online delivery in the last year and a half, as consumers who’d previously been incurious have flocked in droves.
“There’s still more significant growth for the e-commerce space as more companies adopt that model for sales,” Kiselbach said. “That alone is going to drive a significant amount of demand for warehouse space in Canada over the next several years. Until that levels off -- until the amount of adoption levels off -- I don’t think the demand for warehouse space will diminish. Prior to the pandemic, there were people who would never have bought anything online, and now they get everything online.”
Kiselbach added that the increase in demand isn’t necessarily due to new entrants into the e-commerce market; rather, industries have evolved.
“Another use that has popped up is film, in Vancouver and Toronto for sure,” he said, “because there’s a need in film production for storage of film equipment.”
Reading and Kiselbach both, ultimately, believe there’s still room for industrial assets to grow, but both men see an incipient contraction occurring sometime within the following several years. The latter says that shoe will drop when:
“There’s slowing rental growth -- we’ve seen significant quarter-over-quarter growth in rental rates, so one sign is if that starts to slow for multiple quarters,” Kiselbach said. “The same thing applies to vacancy being at a record low in Canada; if vacancy moves in the other direction for several quarters, those would be the two leading indicators.”