Projects where space is sold – not leased – are dominating Metro Vancouver’s industrial market for the first time as property transactions fall sharply from the record investment levels of 2018.
In the first six months of this year, industrial investment struggled to reach $272 million, and it “will likely fall far short of its five-year average,” according to JLL and Altus Group.
The slide began in the first quarter, with a 54 per cent plunge in industrial transactions compared with the record-setting pace seen in the fourth quarter of 2018.
But the bigger story is the transformation of industrial into a strata market as tenants seek shelter from a spike in leasing costs and developers try to cover high land costs.
“Fifty-two per cent of investment volume this year has gone towards industrial strata,” JLL reported in a Q2 Capital Market Insights report. “High land values are making it easier to justify developing and selling at today’s strata prices, which have reached an average of $300 per square foot.”
“Vancouver is the national leader in industrial strata space, and the prices there are higher than in Toronto, the only other market where it is widely used,” said Scott Figler, national manager of JLL capital markets research, in an interview from Toronto.
In fact, some new light-industrial space in Vancouver is already demanding more than $1,000 per square foot.
Yet businesses appear willing to pay for strata space because of ascending lease costs for industrial that are up about 10 per cent from a year ago in a market with a 1.2 per cent vacancy rate.
According to Q2 data from Avison Young, the average industrial lease rate in Metro Vancouver is now $12.70 per square foot and spikes to $19.36 per square foot in Vancouver, by far the highest in North America.
In Surrey, where only 1.3 per cent of its 32.5 million square feet of industrial space is vacant, lease rates are up 13.5 per cent from a year ago to $10.80 per square foot.
Garth White, a principal at Avison Young who specializes in industrial, said Surrey businesses are seeking strata space, which has driven those prices up at least 15 per cent over the past year.
“Businesses are now looking to strata to provide ownership opportunities,” White said.
To meet that demand, PC Urban Properties has just launched the second-biggest industrial project in Surrey with its 10.45-acre IntraUrban Crossroads development on Highway 10 in Cloverdale.
With three buildings totalling 185,000 square feet, the space will all be sold and includes a mix of industrial and commercial space. Unit sizes range from 2,600 to 76,000 square feet.
“We are transforming an underutilized, dormant property into a new business hub in Surrey that has the potential to generate 265 full-time jobs,” said Brent Sawchyn, CEO of PC Urban Properties.
All units are being built to industrial standards, with grade loading (larger units feature dock-level loading), 26-foot ceiling heights, high-efficiency lighting and fire sprinklers.
Strata prices have not been released, but Sawchyn is confident that Crossroads will be a success.
He noted that other IntraUrban strata developments sold out before construction completion in Vancouver, Richmond and Burnaby.