Still shaky after two years of financial turmoil and recession, industrial real estate markets in Western Canada are again finding their feet.
The stability of the Vancouver market is emblematic of the importance of industrial properties right across the West, with distribution space a bellwether for the health of the sector.
CB Richard Ellis reports that Metro Vancouver industrial vacancies ended the first half of 2010 at 4.5%, slightly stronger than at the end of 2009 when vacancies were 4.6%. While the availability rate (which includes vacant space and space where vacancies is pending) rose to 8.1% from 7.8% over the same period, the shift underlined the rebounding activity in the market. There is plenty of space available for expansion and new tenants.
Top-quality space in the region is leasing, said Gurch Ollek, senior vice-president with CB Richard Ellis in Vancouver. Ollek recently signed three tenants for the 450,000-square-foot second phase of Hopewell Distribution Centre on Blundell Road in Richmond. The first phase was leased to Container World 18 months ago, but the second phase was slower to lease. The leasing wrapped up at the end of August, and plans are afoot for a third phase totalling 275,000 square feet.
“We’re going to start our Phase 3 on spec,” Ollek said, noting that approvals are expected this fall.
Hopewell has leased up, Ollek said, because it’s new space that meets the demand for large-format logistics space that’s key to Vancouver’s status as Canada’s gateway on the Pacific Rim. “We don’t have a real deep market in Vancouver. If a tenant was in town right now looking for 100,000 square feet, there’s probably only four or five buildings he can look at.”
The demand for top-quality space has in turn opened up opportunities further down the food chain, but Class B space will take longer to lease. While pricing was key to Best Buy’s deal for 260,000 square feet on Braid Street in New Westminster, Hopcott Centre – formerly leased to the Vancouver Olympics Organizing Committee – hasn’t attracted the same interest.
This is partly due to the sense of caution in the marketplace, with quality and security trumping quantity when it comes to leasing new space. Ollek believes the current timeline for leasing up vacancies might be six to even 12 months. His own forecast is stark: “I don’t think we’re going to see it come back real quick.”
Some of the most exciting offerings for smaller users, he said, are strata-titled offerings.
Strata sites
Peter Hall, who with Chris Davies handles industrial property for Re/Max Davies Hall, said banks are lending again, and users are willing to spend on their premises that let them accumulate equity while reducing uncertainties associated with costs. With financing available in the 4% to 5% range, many small users find the prospect of ownership more attractive than leasing.
Hall cautions against painting too robust a picture, however. The market is normalizing rather than taking off, with purchasers wary even when dealing with units of just 2,000 to 5,000 square feet.
“We’re pulling out of a recession,” Hall said. “The small businesses, which we deal a lot with, they’re cautious.”
The same is true of developers. Those who scooped up deals during the financing woes of the past two years are positioned to build, but Hall points to Rockwell Pacific Properties Inc.’s project at 4238 Lozelles Avenue in Burnaby. Davies and Hall presold 70% of the 100,000-square-foot project, but attractive pricing was required to get sales moving. Still, demand has been good and pricing has picked up.
Strata sales are also keeping Burnaby’s Beedie Group active. Beedie will start construction this fall on the second two buildings at Shoreline Business Centre in South Vancouver, which will ultimately have 300,000 square feet, and plans are in place for a 48,000-square-foot project at Gloucester Estates in Langley. Beedie also hopes to launch a 140,000-square-foot building in the Lake City area of Burnaby by October.
“These are independent business owners buying these, so they’re obviously feeling reasonably confident with where their business is going,” said Todd Yuen, vice-president, industrial development, with Beedie. But he added: “I think it’s still quite fragile.”
The deals represent commitments of $3.5 million to $4 million for requirements of 12,000 to 30,000 square feet apiece, Yuen said, and often in the hardest-hit markets.
Still, summer ended on a “very, very busy” note, Yuen said, with proposals written for the larger requirements Ollek also observed. Beedie has been fielding requests for build-to-suit space of 100,000 to 450,000 square feet. Regardless of how many of those proposals come to pass, Yuen said it’s a sign that companies are thinking beyond the current difficulties.
The main beneficiaries of the upswing are markets closer to urban centres, because the companies able to locate in the core are typically more mature and have a resilient cash flow.
“You’re not getting your bread-and-butter distribution company,” Yuen said. “You’re getting some sort of high-tech manufacturing company or service-oriented company that’s quite established.”
The resurgence of Vancouver promises better times in Calgary, which was emerging as the low-cost alternative to Vancouver for third-party logistics companies.
“I think that was a function of companies looking at pricing, and Calgary is viewed as a lower-cost alternative to large-format distribution in the Vancouver area,” said Kent Bacon, an associate with Avison Young in Calgary.
Calgary’s industrial vacancies have stabilized as the market responded to changes in requirements by logistics companies as well as shifts in the oil and gas sector. Deceleration in new construction and rising absorption have also helped. CB Richard Ellis reports that availability in Greater Calgary dropped from 6.2% at the end of 2009 to 5.4% at the end of June 2010.
Owner-users
Owner-users dominate sales in Vancouver. While strata sales are a phenomenon in the Lower Mainland, Bacon said owner-user properties have been the strongest segment as the resource sector has adapted and confidence has stabilized.