Industrial real estate: Changes afoot

Evolving industrial development highlights future distribution patterns

By
Western Investor
May 1, 2018





industrial

 

Who is leasing and buying all of this increasingly expensive industrial space in Western Canada? What is driving all this change in our market, particularly in Metro Vancouver? And what does the future hold? 

The constant is change, including the rapid transformation of our core industrial real estate markets. Only 10 years ago, if someone mentioned Amazon, most people would have thought of a jungle. If someone asked if they should build a three-level industrial building in East Vancouver, you would have said that’s crazy. And who would have thought to buy a 10,000-square foot (sf) or 20,000-sf warehouse strata unit without its own loading and yard? 

Today, Amazon is the largest occupier of industrial space in North America at more than 140 million square feet (msf) with plans to add another 18 msf by the end of 2018. And our team is currently in the early marketing stages of the fourth multi-level industrial building to be built in East Vancouver with several more planned. And now, the majority of recent land sales larger than three acres in Vancouver, Richmond and Burnaby during the past two years have been sold to developers intending to build strata warehouse projects because buyers are lined up. 

My team’s business is tenant representation, working with companies who occupy industrial space, and marketing buildings for sale and lease, mostly in the core markets of Metro Vancouver. Most of our business is in Metro Vancouver; however, our work takes us to other B.C. markets and other Canadian cities, including Calgary, Edmonton, Winnipeg and Toronto. The majority of demand in our Vancouver market continues to be driven by distribution of consumer goods, food and beverage, building supplies, and a sprinkling of technology users and film production. In core locations, increasing prices naturally force a transition to more specialized light manufacturing, tech, office and showroom-type uses. The change manifesting in Vancouver’s competitive and constrained industrial market is one step ahead of other Canadian markets and generating innovative building forms. What is driving the changes to the market in Vancouver? Everyone knows we have a limited supply of industrial land and that prices continue to skyrocket, forcing users to operate more efficiently. Distribution centres are bigger, ceiling heights are higher (often 36’-40’ clear) and racking and lift systems continue to evolve. In the city of Vancouver, where land prices are now more than $20 million per acre, we will continue to see multi-storey industrial buildings proposed. However, I would also argue that some of the changes now are the result of population growth and the densification of the downtown core and town centres as well as technology and our changing shopping habits, driven in good part by millennials. 

 

E-commerce distribution

 

E-commerce sales grew by a whopping 16 per cent in North America last year, compared with slightly more than a 3 per cent growth in retail spending overall. Amazon is clearly the market leader in e-commerce, but it’s not alone. Every retailer is scrambling to catch up and match the service offered by Amazon, with the highest percentage growth in e-commerce sales being posted by Wal-Mart in 2017.

How does this impact the industrial real estate market? With the continued growth in e-commerce, there is an increasing demand for warehouse inventory conveniently located close to downtown cores. In early March 2018, I attended an industrial real estate conference hosted in Seattle called ‘The Last Mile’. The conference examined the exploding growth of e-commerce and the importance and high cost associated with ‘The Last Mile’ in the business-to-consumer experience. We toured the new Amazon Prime Now and Amazon Fresh pick-up facility just south of downtown Seattle. This is one of two Amazon pick-up facilities where a consumer is able to place an order online and then simply drive through the facility and pick up their groceries in a turnaround time of less than three minutes. The model is inexpensive, convenient, fast and is being closely watched by other retailers. The facility we toured was part of an old Sears warehouse, comprising approximately 20,000 square feet with four dock-level loading doors at the rear and just a 14’ ceiling height, low by today’s standards. What was most surprising was the 12’ racking system and seemingly random stocking of shelves, which apparently is most efficient because it best mimics a typical buyer’s order. 

In the core industrial markets of Seattle, not unlike Vancouver, antiquated industrial buildings with lower ceiling heights are increasingly in high demand and vacancy has fallen below 1 per cent. Distribution models are shifting throughout North America. Instead of a retailer having a large regional distribution centre to serve several stores in an urban area, the forecast for many retailers includes fewer and smaller stores but additional warehouse facilities for return centres and smaller pick-up facilities close to downtown centres. This fundamental shift in distribution patterns will continue to push industrial development forms in Vancouver to new heights – and in other major Western Canadian cities as well.

 

Next: Better to buy than lease
Previous: Investing in the office sector


Russ is a principal at Avison Young where he specializes in the sale and leasing of properties in the Vancouver region, and working with users in an advisory role.

Avison Young Vancouver
#2900 – 1055 W Georgia Street
Vancouver, B.C. V6E 3P3
Office: 604-757-5115

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