Western ÎÚÑ»´«Ã½’s industrial markets faced slack times last year, but the year ahead promises fresh opportunities as demand normalizes and developers recalibrate supplies to meet demand.
While the industrial market is a foundational piece of real estate markets, serving as the staging area for delivers to some of the region’s major projects as well as distribution points to retail and residential sectors, the past year brought a softening.
Developers pulled back as uncertainties around interest rates stalled projects and prompted users to hold off signing leases. Deals took longer to do, and vacancies rose as a growing volume of available space awaited tenants. While availability rates remained tight by historical standards, the lack of immediate uptake prompted developers to offer inducements to retain tenants.
“Tenants have options and they’re taking longer and people are going to start to get a little squirrelly because they’re not used to that,” Jean Batie, director of leasing at Wesgroup Properties told the Vancouver Real Estate Strategy and Leasing Conference last fall. “If you’re new to the market, you’ve got a good opportunity.”
Current availability rates stood at 3.4 per cent in Vancouver heading into 2024, according to CBRE Ltd., hardly a disaster but a sharp shift from, 1.2 per cent a year earlier. With 7.1 million square feet under construction, upward pressure on vacancies has continued. CBRE expects Metro Vancouver's availability rate will hit 4.3 per cent by the end of the year.
“There is a lot of projects completing in the next 12 months that I know have no preleasing,” Pete McFetridge, vice-president, leasing with the Onni Group of Companies told the conference.
But the limited number of options available for the long term meant that construction would need to continue, even as availability increased.
“Construction will continue; we need to,” he said. “The pressure on the industrial supply is just outweighed by the demand.”
David Basche, president of Astria Properties, is seeing this in both the Lower Mainland and Kelowna.
“The backlog of demand in the market is really, really significant, and now that there’s more economic certainty, some stability in the interest rate environment, we’re starting to see that demand appear,” he said.
Astria focuses on properties of less than four acres in size, a niche that allowed it to deliver projects with a smaller footprint to specialized users.
In Kelowna, it is developing a 32,000-square-foot project for ÎÚÑ»´«Ã½ Post that will serve as a letter depot. The project had specific parking requirements and required a specific configuration together with a zero-carbon target, but the smaller site in the Reids Corner area for ÎÚÑ»´«Ã½ Post’s location requirements.
Projects in the Lower Mainland tend to be larger. A sizeable volume of vacancy is tied up in blocks of 50,000 and 100,000 square feet, which brokers expect will be snapped up as economic conditions stabilize.
The natural constraints on Metro Vancouver’s land supply mean the market is largely self-regulating, said Jason Kiselbach, executive vice-president and managing director for CBRE in Vancouver.
This year, deliveries of new space will be half what they were last year, helping vacancies stabilize before starting to come down in 2025.
“The supply side is starting to slow down, the activity is picking up from tenants and purchasers, so you’ll see a normalization of vacancy,” he said.
It’s a different story on the Prairies, which had seen growing interest from national companies seeking low-cost alternatives to the major markets in Vancouver and Toronto. Calgary in particular was positioned as an attractive destination, and coupled with strong in-migration that provided a ready workforce, several pieces came together to contribute to strong demand.
“They’re a market where, when institutions or big private developers decide to start building their supply cycle can just go because they have so much land,” Kiselbach said.
A tide of new deliveries is also driving up availability in Calgary, which will end this year at 6.3 per cent versus 5.5 per cent at the end of 2023. Since land costs are relatively cheaper, the new space remains affordable next to existing space.
“If you’re in a couple of buildings or older space, and there’s all this new supply coming, the rental rates aren’t significantly higher than what you’re in,” Kiselbach said.
But there are rumblings of concern within the major Alberta markets, according to Susan Thompson, associate director of research with Colliers in Vancouver, as well-located sites become scarce.
“If [users] are looking to be proximate to the urban core, if you want to be close to the airport or last-mile delivery, you’re getting pushed further and further out,” Thompson said.
While developers in Vancouver are looking to the eastern Fraser Valley, an equivalent distance in Calgary feels too distance from the urban core.
“For a Calgary person, an hour is a long way,” Thompson said. “They’re surrounded by an ocean of land, however, companies are mindful of how far out from the core or their last mile they’re going to be.”
This hasn’t dissuaded out-of-province users from locating in the city, however.
“The local investors have one view on it, whereas global investors – or at least national investors – are going, ‘Calgary looks pretty good,’” she said.
The same could be said for Edmonton, where availability rates are set to hold steady and even fall this year, according to CBRE. While absorption and new supply will continue to pull back from the peaks seen in 2022, stable demand help absorb space in what CBRE calls “the year of existing industrial product.”
Continued growth of oil and gas tenants and associated users will drive activity, though the market is diversifying with the influx of new residents with their own business plans.
“Our manufacturing sector’s doing well, farming, forestry – all of the industries in Alberta seem to be hitting on the right growth,” said David St. Cyr, a principal with Avison Young in Edmonton. “The result for the industrial real estate market is that we see people opening new businesses, or businesses are expanding as they hire new workers.”
The strength of leasing activity has, in turn, contributed to stronger investor interest.
A number of major deals have followed as the major institutional investors reassess their portfolios. REITs, in particular, have been off-loading industrial assets, with private investors stepping up to acquire the opportunities as long-term plays.
Morguard REIT, for example, sold Rockyview Business Park in Balzac to Concert Properties Ltd. on February 27 for an undisclosed amount.
The park includes 436,291 square feet across three fully tenant buildings on 24.4 acres just north of Calgary’s city limits.
Morguard, with its partner the ÎÚÑ»´«Ã½ Post Pension Plan, is also in the process of selling a portfolio of properties to Anthem Properties Group. The first three assets trading in December for an undisclosed amount. The three buildings total 282,000 square feet and include two in Crossroads Commercial Park in southeast Calgary.
Demand among investors for industrial is also strong in Vancouver, where the most notable transaction of the year was the sale of Amazon's multilevel distribution centre at 5213 North Fraser Way, Burnaby, to Pontegadea Inversiones SL for $358.9 million.
