In Vancouver’s increasingly tight industrial market, vacancy rates have hit new historic lows. The city’s industrial vacancy rate has now dropped to 1.4 per cent from 1.7 per cent last year. Things should start to stabilize this year, with more than five million square feet now under construction.
But with upward pressure on demand, tight supply and increasing industrial lease rates for tenants across the board, Vancouver industrial continues to be a leading asset class for investors. In 2018, rental rates increased 16 per cent to $11.86 per square foot. This is the highest market average rate on record and is indicative of the market’s prolonged low vacancy rate environment. This rise has been unprecedented but will likely be absorbed by multinational tenants. Metro Vancouver has potential for industrial lease rates to grow.
While tenant demand is expected to remain strong in 2019, lack of available product moving forward will put continued pressure on prices. CBRE projects positive absorption of an estimated 4.5 million square feet in 2019. Of all construction completing this year, we are already 65 per cent pre-committed in just the first quarter. Leasing availabilities for space over 100,000 square feet are few and far between, with only four existing options on the market. Of these four, three are tailored to distribution uses. An additional four large-scale spaces are under construction.
With these strong fundamentals, we are seeing an influx of global institutional investors into the industrial asset class. Industrial was still the most sought-after asset class in 2018, and we see that trend continuing, with continued upward values and appetite into 2019. We started to see more core assets trade in 2018, and we expect more to come this year. Local private investors used to be the most aggressive in our marketplace, but international buyers are now coming in and outbidding them for local trophy assets.
Nevertheless, there are still opportunities for investors. We expect to see an increase of local investors in the small-to-mid-size value properties.
Given the outlook for continued lease rate increases, the going in return rate is less of an issue for both institutional and local investors.
With ongoing confidence in the industrial market, investors will continue to be aggressive in pursuing industrial assets, resulting in the continuation of industrial as an attractive opportunity for all investors.
We do anticipate cap rates stabilizing in 2019.
Best opportunities in Metro Vancouver
Existing buildings: With our city’s severe shortage of land and historically low vacancy rates, investors are looking to buy existing assets because it’s extremely difficult to find sufficient land to build an industrial portfolio. As a result, investors are buying existing inventory at low cap rates with the foresight that lease rates will continue to improve.
Redevelopment sites: Investors are aggressively looking at redevelopment sites with existing income for future redevelopment. Investors are willing to accept a lower yield for a few years, until redevelopment is financially viable. Another trend we are seeing is investors taking underutilized sites where there’s a possibility for redevelopment and densification. Those sites are most sought after close to the urban core where densification makes the most economical sense. Global investors who have done this in other parts of the world are most bullish on this in our global city.
Industrial strata: The industrial strata market in the core is one of the strongest for investors in North America. In 2017 and 2018, strata sales accounted for 70 per cent of all industrial transactions. Strata remains the best vehicle for owner- users and small investors who need to control costs and want to offset lease increases into the future. With rising lease rates, this asset class will remain strong through 2019.
Overall, Vancouver’s industrial market is seen as the safest and strongest for commercial real estate potential. It used to be boring, but industrial is now the most exciting and evolving asset class.