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Vancouver industrial strata seems immune from interest rate hikes

With a near-zero vacancy rate and lease costs soaring, advantages of buying workspace trump fears of higher mortgage rates
Intra Urban langley
Intra Urban Cornerstone: industrial strata space sold out quickly in this Langley project by PC Urban and Nicola Wealth. | Submitted

Strata – where space is sold rather than leased – now dominates both speculative industrial development and transactions in Metro Vancouver and the trend appears immune from rising mortgage rates.

Metro Vancouver now has the lowest industrial rate in North America, at 0.1 per cent as of the second quarter 2022, according to Colliers’ research. Lease rates, now nudging $20 per square foot, are double what they were pre-pandemic and have increased 22 per cent in the last year.

Colliers launched a study this year to judge the potential impact of rising interest rates and inflation on both Vancouver’s office and industrial markets, according to Susan Thompson, Vancouver-based associate director of research at Colliers. 

It found that the industrial strata market is capable of riding out the mortgage rate hikes, which have nearly doubled commercial financing rates since the start of this year.

“Industrial strata projects in [Metro] Vancouver continue to see record breaking pricing, even with rising interest rates,” said Thompson. “However, strata developments in the Fraser Valley are facing more uncertainty with rising interest rates and rising construction costs”

Thompson noted that smaller or nascent industrial strata developers, especially those targeting investors rather than owner-occupiers, are more exposed to interest rate hikes.

“Developers with deeper pockets can ride this out,” she said.

 “This is a transitional quarter,” remarked Thompson. “Colliers is studying the market to determine whether there will be pause or a decline in market conditions. Stats from Q2 continue to show market pricing on the rise, but some occupiers and developers are cautiously watching {the changing environment] regarding real estate decisions moving forward."

Thompson said some developers are stalling industrial strata projects, but she declined to be specific.

Meanwhile, seasoned developers are forging ahead with projects.

Three of the five largest industrial developments under construction in the Metro region are strata projects. One of the largest of these is a Conwest Group building on No. 3 Road, Richmond, at 250,000 square feet.

The latest is by PC Urban Properties and Nicola Wealth, which partnered to acquire 2660 Barnet Highway in Coquitlam this month for $24 million. The 3.48-acre site will be used to develop 100,000 square feet of small-bay industrial strata product for owner users and investors.  

“With increasing lease rates and perpetually low availability, this project could very well still experience record-breaking [strata] pricing, even amidst rising interest rates,” Colliers noted in its Q2 2022 Metro Vancouver Industrial report.

“The rising interest rates themselves may not necessarily have a strong immediate impact on the industrial sector. Many leasing opportunities are seeing multiple offers being put in by well established companies and are still achieving lease rates of over $20 per square foot,” the report added.

The price of industrial strata space will average $590 this year, according to a CBRE study in the first quarter, up from $390 in 2020, but can easily spike above $800 per square foot for prime projects in good locations.

Other analysts agree that investing in the industrial condos seems solid.

“Metro Vancouver [industrial] strata prices may appreciate less rapidly and eventually level off, but they are unlikely to face downward pressure,” according to Avison Young, Vancouver, which predicts rental-rate growth to be “significant well into the future.”

The Avison Young Q2 2022 report added, “the prevailing tight market conditions will continue to support the development of strata industrial space, which will remain in high demand.”