Industrial asking rates in the Greater Vancouver Area (GVA) have stabilized for the first time since Q3 2019, according to Colliers’ Vancouver Industrial Market Report for Q2 2023. As one of the most competitive markets in Canada, the region had been setting record-high asking rates every quarter over the last four years, increasing at a compound annual growth rate of 15.7%. But now, the sustained series of rental increases has come to an end, with the average asking net rate holding steady at $22.05 per square foot in Q2 2023.
Vacancy in the quarter climbed by 50 basis points to 0.6%. Meanwhile availability, a truer indicator of overall free space, climbed 20bps to 1.7%.
About 1 million square feet of new industrial space was added to the market in the second quarter, but only 5% of that space entered as vacant at completion. More help is on the way, as about 4.9 million square feet of space is expected to be added this year. With the market still deprived of vacancy, there are no signs of sustained downward pressure on rates in the near future.
It all points to a modest flattening in the market. We need, however, a more pronounced softening — and the best way to achieve that is by adding more space to the market and generating other solutions, including easing the permitting process, diving deeper into innovative industrial design and by freeing up more land to build port-related distribution space. A balanced market would tend to have vacancy in the 3-5% range. In order for that kind of vacancy to emerge in the market, we would require 7-9 million square feet of new industrial space to become available. The regional and national economies are relying on this.
Modest easing brings benefits for tenants
We're seeing some of the supply and demand pressure ease, but we still can't build fast enough to increase our vacancy rate into balanced territory.
That said, there are more options on the market for tenants. For an occupier seeking a 100,000-square-foot space, there used to be one choice on the market, or none. What’s more is the prospective users would often have to wait two to three years for the building to be constructed. Now, we might be able to present them with two or three options, including a space that’s available much sooner.
Meanwhile, elevated interest rates and global economic headwinds have some of the larger transnational companies putting a pause on expanding their footprints. This pause from major corporate users based on economic uncertainty is taking some of the heat off the market and creating a bit more room for local users to establish a regional presence or expand their operations to keep pace with economic needs — especially in port-related distribution and e-commerce logistics.
Availability is inching up, so that naturally takes pressure off asking rental rates.
The challenges that remain
Vancouver is home to Canada's busiest port, making the Lower Mainland a key part of the national economic engine. But because of our constricted industrial market, the logistics process for Western Canada sometimes doesn't make much sense.
Here's an example. Some of the largest international retailers have millions of square feet of distribution space in Calgary. Much of that product arrives in containers in the Port of Vancouver and then is trucked or railed to Calgary to be stored, picked and processed before it's shipped back over the Rocky Mountains to retailers and companies in B.C.
That's a process made necessary due to a lack of suitable distribution space in and around the Lower Mainland. We need solutions. There are a few worth discussing and driving forward.
Ease permissions process, keep pushing innovation and free up land
The municipal and government approval process needs to continuously improve. It's difficult to get projects of any scale approved through the various development and construction stages quickly and efficiently enough to help ease the space burden.
That has been the case for far too long in our region and it’s essential to update the process. Developers would benefit from municipalities creating a standardized set of guidelines and specific timeline requirements to provide permits. In reality, some municipalities are quick to provide feedback; others take months. Every delay adds to the overall cost of a development and hinders the creation of new, essential job space.
Meanwhile, because of the region's shortage of industrial space, Vancouver has become a test market for innovation in industrial space design. It's important for building designers and developers to lean deeper into that creativity.
There are examples of creative industrial projects, including Oxford Properties’ Riverbend Business Park in Burnaby, Canada’s first large-scale, multi-level industrial building and Wesbild’s Marine Landing — a two-building, four-level, mixed-use industrial project near Marine Drive. Marine Landing, a partnership with KingSett Capital, is a mixed-use industrial project with 236 light industrial and office strata units.
The current industrial situation also demands that we zone, design, permit and build more mixed-use projects that fold together light industry, retail and residential uses. These structures are not noise- and pollution-spewing burdens, but rather, high-tech, digital, and logistics-oriented spaces that can co-exist functionally with other types of users and residents. We have test cases like Strathcona Village on Hastings Street in Vancouver that can and should be replicated.
Such mixed-use industrial projects would present the ideal venue for micro-fulfillment — a strategy that places small-scale warehouse facilities in densely populated urban locations closer to the consumer, typically in underutilized spaces within mixed-use buildings, to improve delivery times. It's an extension of last-mile delivery, but using a smaller format distributed over a larger area. These highly integrated mixed-use projects allow for the development of more complete communities that incorporate all the different elements of a vibrant neighbourhood.
It's also essential to find ways to make more land available for industrial development.
This has long been a political hot potato, but it’s time for all stakeholders to discuss B.C.’s Agricultural Land Reserve as part of an overall land-use review for the region. Nobody is saying that agricultural land isn't essential, because it certainly is, but industrial land is equally important and needs to be safeguarded and managed with similar enthusiasm and guardrails.
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