By: Peter Mitham
July 8, 2024
Strata industrial space is showing signs of stabilizing after two years of lacklustre demand.
New construction and a slower economy have expanded lease options for tenants, with CBRE Ltd. reporting a 2.5 per cent vacancy rate in Metro Vancouver at the end of the second quarter. Meanwhile, high interest rates have put the brakes on strata unit sales, with the latest statistics indicating slack times in the market.
CBRE noted that Vancouver led the country as asking prices pulled back, falling 8.7 per cent versus a year ago to $525 per square foot in the second quarter. This remained the highest in the country by a wide margin, however, with Toronto being a distant second with an asking price of $376 per square foot.
“Since the increase in interest rates in 2022, industrial sales activity has been subdued,” Cushman & Wakefield reported in its own report on the industrial market in the second-quarter. “Owner-users have dominated sales transactions, while investors have faced difficulties due to low yields and financing constraints.”
But industrial strata is seeing renewed demand, it said.
“Prices have adjusted, especially for standing inventory, with users dominating the buyer profile,” it reported. “A further factor in the decision to buy vs lease (for those who have the cash available) is the face that strata sale prices on new inventory have dipped by approximately 10 to 15 per cent from their peak in 2021.”
The dynamic was in the spotlight during a panel discussion the Women’s Leadership Initiative of the Urban Land Institute hosted in Vancouver on June 18.
Time was, the market thought $1 million for a 1,500 square-foot industrial unit was extreme, said Craig Taylor, principal of TKA+D Architecture + Design Inc. in Vancouver. Now, the extreme is $1 million for 750 square feet.
Yet demand seems to be there, though as fellow panelist Michelle Sotomayor, development manager with Conwest Group notes, “the market has changed.”
The second quarter saw 391,678 square feet returned to the industrial market, according to CBRE, the first quarter of negative absorption in years, undercutting 1.3 million square feet of absorption in the previous quarter.
“This is translating into lower rates. Anecdotally, we’re hearing 10 to 15 per cent off,” Sotomayor said. “It has cooled.”
While the cut in interest rates at the beginning of June was a positive move, Sotomayor doesn’t expect an immediate improvement in commercial markets.
But as Metro Vancouver senior regional planner Eric Aderneck pointed out, companies that need to be in Metro Vancouver, or a specific submarket in order to attract employees, will pay up.
This is what PC Urban is noticing at several projects around the region.
Foundation, a project at West 8th and Columbia Street, will deliver 47,578 square feet to the market by late 2026. Developed by PC Urban in partnership with Nicola Wealth Real Estate, the six-storey project won a 4.5 floor space ratio (FSR) designation from the city because of its commitment to adding jobs space within the Broadway corridor.
“We’re one of the first applications approved under the new Broadway plan initiative for greater density for employment uses,” said Brent Sawchyn, CEO of PC Urban.
PC Urban has fielded two letters of intent that would see the property half sold id the parties step up.
“We’re seeing more confidence returns to owners, businesses’ perception of taking on their own space,” Sawchyn said of the current moment.
While office vacancies remain high city-wide, averaging 9.7 per cent (still the lowest in Canada), sub-areas like Mount Pleasant are home to a diverse population attracted by housing and amenities. Companies are following them, accommodated by zoning for higher density employment space.
PC Urban is seeing similarly positive demand elsewhere, pouring the foundation for its Eagle Ridge project in Coquitlam in May as well as breaking ground at a site in Vancouver’s Southlands in June. Both are approximately 35 per cent pre-sold, with prices in Coquitlam averaging $751 per square foot and those in Southlands seeing $832 per square foot.
Owner-occupiers looking to expand dominate the buyer pool rather than investors seeking elusive cash flow.
This is good news for Sawchyn, who says the current market has left the heady days of 2021 and 2022 behind, a period he said was “not normal.”
“It represents a more stabilized market,” he said. “We’re very encouraged about the marketplace. We think everything’s going to be just fine.”
