Industrial Market
Joel Barnett, Executive Vice President, CBRE
https://www.cbre.ca/people/joel-barnett
www.theindustrialspecialists.com
The industrial asset class in Metro Vancouver has maintained its strong performance throughout 2023. In the last three years, industrial businesses grappled with inventory challenges due to unpredictable consumer trends and increased e-commerce adoption. This led to fierce competition for space, with occupiers leasing whatever was available.
This year occupiers have better managed their inventory, adopting a more cautious approach. Additionally, there's a decline in demand from local 3PL operators due to escalating costs and film-related companies impacted by strikes. This shift has caused a 220 basis point rise in the industrial vacancy rate to 3.0% year-over-year, primarily concentrated in large format distribution spaces. Notably, there are now 12 options available for spaces larger than 100,000 sq.ft., compared to none last year.
Rental rate performance varies by transaction type. Rates have generally stabilized in the $20-$22 psf range with annual escalations below the previous 4% average.
The surge in demand for industrial sale products, particularly strata units, has eased due to a rapid increase in interest rates over the past 18 months. While investor interest in strata has cooled, owner/occupier demand persists in certain projects, resulting in 23 units sold this year.
Current fundamentals suggest a potential oversupply of industrial development in the near term, possibly marking the first year of more supply than demand since 2009/2010.
Despite these trends, several factors contribute to strong demand, including population growth, a significant Port, a mature local industrial business base, e-commerce adoption, emerging uses like food distribution, and the likely resolution of the film strike soon.
We believe 2024 will be similar to 2023. However, we expect to see an uptick in demand as soon as interest rates start to ease. As every property is unique we always suggest consulting with an industrial specialist to ensure you are in sync with the market.
Fraser Valley Market
Joe Varing, Principal, Varing Marketing Group
2023 emerged as a year full of promise for landowners and real estate developers, but it quickly evolved into a period of uncertainty. Initially buoyed by optimism, the market soon faced the challenge of rising inflationary pressures. Surprisingly, the Bank of Canada's aggressive stance against inflation led to significant hikes in interest rates, impacting the real estate sector. Developers found themselves navigating cautiously, marking a major market shift not seen in years.
Despite these challenges, 2023 maintained a steady flow of eager buyers and sellers, demonstrating resilience in the market and for Varing.
Looking ahead to 2024, the Fraser Valley continues to shine with potential. Its desirability as a residential area withstands market fluctuations, and its foundational strength promises long-term growth. We believe in the power of patience during such times, as they often present unforeseen opportunities. With hope and anticipation, we predict that 2024 will see at least four downward interest rate adjustments, opening new possibilities for the market. Let’s stay ready to seize these opportunities together.
Presale Multi-Family Market
Matthew Lee, Managing Partner, Macdonald Platinum Marketing
https://macdonaldprojects.com/
2023 marked the first year in the history of Vancouver and the Lower Mainland where the high costs of borrowing had a cascade effect on sellers, buyers, and tenants.
Sellers had little motivation to accept lower prices, would-be buyers were unable to secure enough financing to purchase and tenants were faced with record-high rental rates while dealing concurrently with record-low inventory levels.
Over the past 60 days, fundamental housing reform has been announced by both the municipal and provincial governments. With so much on the table to consider, we anticipate that residential land sales within 800 metres of SkyTrain stations will pause in 2024 for a couple of reasons: 1) sellers are collectively recalibrating their property’s value and 2) there is no inventory for would-be sellers to downsize into.
Construction costs remained high and likely will not change in the immediate future. The high cost of borrowing continues to erode developer profits - so it was no surprise to see a second straight year of delayed market housing/market rental projects across the board.
We expect 2024 to be robust. If interest rates begin their descent by Q2, there will be a flurry of activity as pre-approved buyers are eagerly waiting on the sidelines. A lack of overall inventory will likely see more buyers and investors shifting their focus to presale development and what little relief (if any) will be arriving next year in a drip format.
Vancouver Island Market
Amanda Neal, Senior Vice President, Avison Young
www.avisonyoung.com/web/victoria
Greater Victoria’s real estate market is ending 2023 with sales down again this year, as rising inflation eroded buying power. Higher mortgage rates following the Bank of Canada monetary policy tightening continue to push prospective buyers out of the market and onto the sidelines. Today’s market is much different than a few years ago. The number of listings continues to rise with a softening trend in prices.
As the provincial capital, there are government offices throughout Victoria, as well as significant post-secondary institutions, and military and scientific facilities located in the region. These help to strengthen the local office market with consistent leasing activity showcasing Victoria’s resilience and stability. The overall vacancy rate increased to 6.5% with office rental rates lower on average year over year, as landlords become more willing to offer concessions to quality tenants to secure long-term deals. Investment sales volumes are down, while strata office and owner-occupier opportunities have achieved healthy sale prices. Occupancy levels in office buildings continue to remain low, but more companies are seeing an increase in employees returning to the office. We expect many companies will maintain a hybrid model of working from home alongside mandatory days spent at the office. Demand for quality Class A space and unique heritage space downtown remains a trend that we expect will continue. Despite the flight to quality, development continues at a very measured pace and not without anchor tenants secured in advance.
The strength of Victoria’s retail market varied across the region, aided by a return of tourism and cruise ships, many retailers downtown reported improved sales figures during the summer, but downtown streetfront vacancy increased by 2.5% which is largely attributed to new supply in the market, as well as intentionally vacant properties slated for redevelopment. Victoria’s primary downtown retail thoroughfares and nodes remain vibrant and attractive to businesses, while peripheral streets and properties with larger or shell premises can be challenging to lease up. Retail shopping centres and suburban plazas remain highly sought after with strong absorption, and increased rental rates resulting from the growing population they serve. Retail investment remains on par with historic trends and we expect the performance of this sector to remain consistent in the year ahead.
The industrial sector in the Victoria market has provided fairly ideal investment performance over the past 20 years, maintaining low vacancy while offering steadily rising rents and capital appreciation. The primary challenge for this sector on Vancouver Island has been the lack of zoned industrial land, the effect of which is that land values and rents have been substantially increased. While this has been beneficial in terms of the investment returns provided to owners of industrial land and buildings, it has also reduced the growth of the sector below its potential as many users choose to service their Island clientele from afar.
There is now approximately 9.425 million square feet of industrial space spread around the Greater Victoria area. The supply of industrial space has not kept up with demand, but there are a number of projects planned (3 million square feet in total with 550,000 sf currently under construction) that will help vacancy rates settle at more balanced levels.
It is a powerful testament to the underlying strength of Victoria’s industrial market that the vacancy rate has been below 5.0% in all but three years since 1990. The highest point that the vacancy rate reached was 6.2% in 1995 and a low point saw the rate fall below 0.5% from 2005 through 2008, with the vacancy rate similarly at historic lows in recent years at just 0.2% currently.
Many of the commercial transactions we have seen in the last year were those by owner-occupiers looking to acquire their own facility. Many such transactions are evaluated on a cost per square foot of land and building and by comparing the applicable market rent as a tenant to the cost of servicing the mortgage obtainable to finance the purchase. With rates in almost every asset class holding and often escalating in value, despite the added borrowing costs, many businesses have seen the value in owning their own facilities.
Despite economic challenges, Vancouver Island remains well positioned for continued growth and considerable demand with supply being relatively scarce and strong market fundamentals overall.