Rising interest rates could slow new industrial strata projects
There’s little relief on the horizon for the Vancouver industrial market, but rising interest rates are creating the potential for an inflection point that could see developers hit pause.
“Vancouver’s industrial market is just blistering white hot,” said Susan Thompson, associate director of research with Colliers International in Vancouver.
Metro Vancouver is ending the second quarter with the tightest industrial market in North America, Colliers reported this week. Vacancies average 0.1 per cent across the region, and availability is little better at 0.5 per cent.
This has fuelled a 22 per cent increase in asking rents versus last year, with landlords now asking an average of $19.19 a square foot. Many buildings are leasing for well in excess of $20 a square foot.
“That’s a direct result of the incredibly low vacancy rate, which is now the lowest vacancy rate in North America, at 0.1 per cent. That’s almost unheard of,” Thompson said. “There’s a lot of pressure on availability and there’s a lot of pressure on prices because there’s a shortage of options.”
There’s also a shortage of new supply. While approximately 7.8 million square feet of industrial space was under construction this quarter, almost all of it is spoken for.
“There’s nothing out there for companies to move around in, so they’re having to do their deals further and further in advance,” Thompson explained. “There’s almost 8 million square feet of new industrial under construction right now, and that sounds like a lot, but with vacancy as low as it is, we’re going to need even more.”
Rezoning of approximately 600 acres in the Campbell Heights area is the market’s best hope for relief right now but there’s no set timeline.
“We’re hopeful that it comes as soon as it can,” Thompson said.
Strong rents mean investor demand for industrial properties is likely to remain strong despite rising interest rates.
Colliers forecast in April that cap rates would hold steady through the second quarter at between 3.25 per cent and 4.25 per cent for Class A buildings.
“Many leasing opportunities are seeing multiple offers being put in by well-established companies and are still achieving lease rates of over $20 per square foot,” Colliers reported.
“It seems to be a transition period in the market while we try to figure out what do these changing interest rates mean, and how are they going to impact various decision-makers and real estate deals,” Thompson said.
New developments, particularly strata-titled industrial units, may be the most vulnerable.
“Developers are working to make economic sense of new and upcoming developments, especially strata industrial projects,” Colliers reported.
But a white hot market could keep things on the boil for awhile yet.
Among the deals done in the quarter was the $24 million purchase by PC Urban Properties and Nicola Wealth Real Estate of 2660 Barnet Highway in Coquitlam for a strata-titled small-bay industrial project for owner-users and investors.
“With increasing lease rates and perpetually low availability, this industrial strata project could very well still experience record-breaking pricing, even amidst rising interest rates,” Colliers stated.