How to invest in industrial real estate

How and why to invest in one of Western Canada's tightest market

By
Western Investor
June 22, 2017





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Typically outshined by trendier commercial asset classes, investing in the industrial real estate sector often takes a backseat to more high-profile addresses and innovative architectural design projects. Located in discrete areas of the city that garners little public attention, to the average investor, property types like warehouses and manufacturing tends to fall off the radar.

However, what it may lack in glamour, it makes up for in demand. In regions like Metro Vancouver, Calgary, and Edmonton, vacancy rates are far lower than any other commercial asset. In Metro Vancouver, the industrial vacancy is currently 2.2 per cent, according to a recent Q1 2017 Industrial Market Statistics report by CBRE. In Calgary and Edmonton, vacancies are approximately 9 per cent; a significant difference compared to 25 per cent vacancy rates in downtown offices.

From real estate investment trusts (REITs) to private business owners, the historically low interest rates have made the industrial sector more accessible and attractive than ever before. Beth Berry, director of industrial development at Beedie Development Group, said private investors and pension funds are all looking to increase the amount of industrial in their portfolios, particularly in key markets like Metro Vancouver, Calgary, Edmonton, Toronto, and Montreal.

“There is a huge appetite for industrial income producing product, which has been increasing over the past few years. The key drivers for investors are tenants with good covenants in long-term leases or rental upside potential in markets with low vacancy. It goes without saying the biggest demand is for Class A, high ceiling distribution space or newer multi-tenant facilities. With these in short supply, there is also a lot of demand for older multi-tenant buildings with low vacancy.”

Like any investment, there are always a number of factors to consider before you sign the dotted line.

From surrounding infrastructure to location, look for key demands that are currently driving the market.

Ceiling heights: Depending on the type of tenant you want to attract, ceiling heights are always an important consideration. In general, 26’ ceilings are often sufficient for companies that need less than 50,000 square feet. However, larger users typically require 32’ to even 40’. Retailers who are doing their own distribution typically fall into this category, as do third party logistics companies, who require flexibility with their storage as contracts are won and lost.

Chris MacCauley, Senior Vice President at CBRE Limited, is seeing even greater demand.

“Automation groups are now looking at 40’ to 60’ ceiling heights. However, the issue in some industrial areas will be the poor soil conditions that will prohibit these heights or higher, or require substantial expense that may make the building not financially feasible.”

Strata: In Western Canada, the industrial real estate industry is made up of two types of markets: those that are owned (called strata in B.C.) and those that are not. While some feel strata limits tenants, others believe it helps create a more stable market.

“A typical profile of a strata purchaser is a local owner occupier or investor, as national companies or foreign investors to date have not been active in the strata market. The bulk of strata buyers are purchasing unit sizes under 5,000 square feet, and very few over 15,000 square feet,” said MacCauley.

“Strata also gives an investor the opportunity to own industrial real estate at a value that may be more palatable,” Berry said.

As tenant turnover remains low, investing in industrial real estate is a safe bet for longevity and return. And while it’s clear that demand for industrial properties continues to rise, so too does the competition. In hot markets, it’s said that for every one property, there are five buyers, and more than 50 per cent of the Metro Vancouver industrial properties that are coming onto the market are already spoken for.

Expanding your portfolio to include industrial will likely offer the financial benefits you’re looking for -- whether or not you can secure a property is another story.

 

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