Thought Leadership

How High Can Industrial Real Estate Prices Go?

The Story of the Vancouver Industrial Real Estate Market

I started my career as a commercial real estate broker specializing in industrial properties in November of 2008, the month after the beginning of the largest economic recession in recent history. While the entire US economy was significantly affected, Vancouver, BC, Canada weathered the storm well and there was not as much of a downturn in the local real estate market as was seen in the US. That being said, commercial real estate values were down, more sublease space came to the market and vacancy rates were increasing across all asset classes. As I started brokering more and more transactions in 2009 and 2010, lease rates, vacancy and overall values stabilized and as the macro economy began to recover, the industrial real estate market began to take off.

Over the next 5 or so years, the local industrial real estate market was relatively balanced with vacancy rates between 3 and 4 percent, stable lease rates, and steadily climbing sale prices and inversely declining cap rates for investment assets. In 2017, I looked back at the average lease rate for the past 10 years and with nominal ups and downs the average industrial net lease rate across all markets had remained virtually flat. Most owners and landlords accepted this as the norm and the sentiment was that if lease rates were raised, businesses/tenants would not be able to sustain the payments.

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Despite lease rates remaining effectively flat, sale values began to steadily increase from about 2013 onward. Driven primarily by the dwindling supply of smaller industrial land sites and very few smaller freestanding buildings coming to market for sale. Developers took note of this trend and began constructing large bay strata units seeing an opportunity with significant demand from small to mid sized companies to own their industrial real estate and almost no supply of property. Beedie was a pioneer in this sector developing more projects than any other developer before them. These units averaged 8,000-15,000 square feet filling the need for this demand and the market quickly began absorbing these units on a presale basis while the building was under construction. With a low interest rate climate and lenders such as the BDC and Roynat Capital offering well capitalized businesses up to 100% financing, demand began to exceed the supply being developed quickly and prices began to climb. As industrial occupiers took note of these increasing prices, more and more buyers lined up to purchase pre-sale units, putting further upward pressure on pricing. All of this demand has resulted in strata units more than doubling in value from 2014 to 2019.

Not surprisingly, this significant increase in strata values has increased land values at virtually the same pace as strata developers and owner occupiers continue to be the highest paying buyers for all sites that come to market. These increased land values have made it very challenging for developers to make sense of building industrial property to be marketed on a for lease basis. With a smaller number of new lease projects being delivered to the market given these increased land prices, demand for lease properties began to outstrip supply in 2017 and over the past two years, for the first time in over a decade we have seen lease values increase 25-35%. For the first time since I began my career, I am seeing multiple offer scenarios on quality industrial space for lease causing landlords to offer almost no incentives, and no negotiation on asking lease rates.

So now in 2019 the question is "How high can industrial real estate prices go?". In the first quarter of 2019, I have met with approximately 20 large industrial companies who either own or lease a significant amount of industrial space in the local market and I am hearing the same comments over and over again: "Taxes this year are through the roof"; "This government is definitely not pro business and is killing my bottom line"; "Business is going well, but if things adjust even just a little bit, I don't know if these payments and taxes will be sustainable". The challenge is that as values and lease rates have surged over the past few years, so have taxes. At what point does this increase in the cost to occupy industrial real estate become unsustainable? We will have to wait and see...

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