Industrial, parked
October saw several reports focus attention on the circumstances Metro Vancouver industrial properties and their users face.
Those circumstances generally include low vacancies, elevated development costs that limit new supply and the redevelopment of existing sites, and high valuations that would give owners an incentive to sell were there any place to put the proceeds (properties are limited, after all).
Colliers International reports that third-quarter vacancies held steady at 4.1%, while the availability rate dropped to 6.8% from 7%.
Vacancies predominate in older, less efficient properties, while new, high-efficiency structures are in demand – prompting some users to become owner-occupiers, if they can.
The cost of becoming an owner-occupier often frustrates them, however.
Colliers reports in its recent (and appropriately titled) study, Rising Cost of Industrial Occupier Facilities, that development and construction costs for a standard industrial facility in Metro Vancouver rose 33% over 2012. Shifting building code regulations and the consultants required to address them were the biggest contributors to development costs, with land – that precious and increasingly scarce resource – accounting for no more than 8% in the most constrained municipalities.
But report author Malcolm Earle, a senior vice-president with Colliers specializing in industrial properties, noted that land costs remain important as part of the overall picture.
Colliers ranks Surrey as Metro Vancouver’s most economical city for industrial development, thanks largely to a stock of relatively affordable industrial land in Campbell Heights and the region’s lowest property tax rates.
With more than a million square feet set to complete over the next year, Surrey consequently claims the greatest volume of new industrial construction in Metro Vancouver. Recent investments in highway infrastructure make Surrey more accessible than ever before, reducing companies’ antipathy to relocating – especially if it involves crossing a bridge.
“There’s far better mobility throughout our region than there ever has been,” Earle said. “It’s a lot easier to move goods and services and labour around now than it was five years ago.”
The result is a willingness to see a move less as a hardship and more as an advantage, especially if the price is right.
“Over the next five years, as people start to realize how much easier it is to get around our region, you’re going to see a continued movement,” Earle said.
State of industry
With little movement in industrial vacancies and lease rates stagnating, Colliers International notes that some tenants are vacating premises in favour of strata space – a trend it expects to continue so long as interest rates remain low.
The shift has left older industrial properties in a kind of purgatory, waiting for release and redemption – something observers believe will happen as users try to avoid the rising cost associated with occupying new premises.
Indeed, the latest edition of PwC’s annual Emerging Trends report for the Urban Land Institute notes that “redevelopment opportunities will emerge in the industrial market as developers look to upgrade sites for industrial companies or ‘retool’ for other uses.”
Earle said higher costs are going to prompt users to look a lot closer at staying within their existing facilities.
“They’re probably going to be willing to pay a little bit more to stay where they are.”
Earle expects an eventual convergence between the cost of new construction and retrofitting. This could prompt more owners to follow the lead of companies such as Triovest, which last year made over 7831-7979 Vantage Way in Delta as South Fraser Industrial Centre.
Earle expects makeovers to become more common as owners find the practice makes economic sense.
Short supply
Retrofitting might also be attractive given tight land supplies.
The latest review of the Metro Vancouver industrial land base by the commercial real estate association NAIOP indicates that just 476 acres of industrial land are “serviceable, privately owned lands available for development” in the near term.
This amounts to less than two years’ worth of supply, at current absorption rates.
Moreover, 80% of the acreage is in Surrey – read, Campbell Heights – and Maple Ridge.
The implications of such a short supply for the region are serious.
While development has continued despite the ongoing shortage, NAIOP noted that scale of development is limited and the constraints discourage investment from companies that require large sites. This, in turn, limits the ability of municipalities to boost employment, affecting the region’s overall economic well-being. •
