Avison Young releases Spring 2009 Metro Vancouver Industrial Review: Healthy fundamentals offset by pause in demand; sluggish economy slows deal activity, bumps up sublease availabilities



    VANCOUVER, May 5 /CNW/ - The global economic downturn continues to take
its toll on Metro Vancouver's industrial market, evidenced by low deal
activity, a rise in vacancy rates, and downward pressure on rental rates and
land values. However, sound fundamentals bode well for the region in the long
term.
    These are some of the key trends noted in Avison Young's Spring 2009
Metro Vancouver Industrial Review, released today.
    Metro Vancouver's industrial vacancy rate, which resided under the 2%
mark between early 2006 and mid-2008, skipped up to approximately 3.2% in the
first quarter of 2009 from 2.4% in fall 2008 and 1.9% at mid-year 2008. The
actual amount of space available (which includes head lease or sublease space
that is being marketed but is not physically vacant, or new supply that is
nearing completion and available for lease) is estimated to be closer to 6%,
which technically still favours landlords but points to a more balanced
market.
    "The Metro Vancouver industrial market is characterized by healthy
fundamentals offset by demand currently hitting the pause button," comments
Avison Young principal Robert Gritten. He says the recent rise in vacancy
levels is primarily due to the ripple effects of the current global economic
slowdown, as well as new construction completions. "Businesses continue to
exercise caution, cut costs and shed unneeded space, which has resulted in an
increase in sublease space. Limited tenant demand/expansion, particularly due
to the contraction in the manufacturing and export-related sectors, is another
key factor. Other impediments to more activity include the lack of quality
product available and onerous lending conditions."
    After bringing on substantial levels of new supply of between 3 million
square feet (msf) and 5 msf-plus per year between 2005 and 2008, developers
are expected to curb new speculative development activity in 2009 and delay
some proposed projects until market conditions improve, according to the
report.
    "Despite lower construction costs, developers are generally finding it
economically unfeasible to build rental space at current lease rates and land
costs," notes Avison Young principal, John Lecky, who says major projects
recently completed include Brewers Distributor Ltd.'s 451,000-sf build-to-suit
in Port Coquitlam and Hopewell Development's 443,000-sf 16131 Blundell Road
(Hopewell Distribution Centre) in Richmond, which is currently vacant.
"Gloucester in Langley, which presently has three large vacancies, is a good
example of an area experiencing some difficulty and where the developer/owners
are motivated to lease given the buildings have remained vacant for many
months."
    According to the report, average rental rates, which climbed
approximately 40% between 2003 and 2008, leveled off in the latter part of
2008 and have come off an estimated 10% to 15% since fall 2008 due to the
increase in vacant space. Rates for large (75,000-sf-plus) distribution
centres, which averaged in the high $7-psf range in mid-2008, have now dipped
to the low $7-psf range for new space and the mid to high $6-psf range for
existing space. Average asking rents for sub-50,000-sf spaces in Richmond,
Burnaby and Vancouver, which approached the $10 psf net mark for new and class
A product in mid-2008, have declined to approximately $8.50 psf.
    "Landlords are now more aggressive in getting deals done given the
economic environment and, in many cases, will consider any reasonable offers.
Rates being offered for sublease space are up to 30% lower than rents for
primary space direct from building owners as sub-landlords try to mitigate
their exposure," says Lecky. He adds though that landlords are generally
reluctant to reduce rental rates significantly as primary vacancy rates
continue to rank among the lowest in North America and speculative
construction is in check.
    "On a positive note, our clients are also starting to see more access to
financing, thus enhancing their chances of transacting. Real time market
information is at a premium right now as commercial real estate stakeholders
search for market measurements on which to base their leasing or purchasing
decisions," he says.
    As for land values, given the scarcity of land sales over the past half
year, there is little evidence on which to base any changes in value,
according to Lecky, who estimates that if vendors need to sell land, they will
need to discount from values reached at the peak in mid-2008. Average land
prices doubled between 2003 and 2008 to approximately $1.3 million per acre in
2008 and reached a record $4 million per acre in some Vancouver locations. In
the latter half of 2008, land prices began cresting due in part to surging
construction costs in recent years, and the fact that developers could not and
cannot economically build at current land values.
    "Construction costs have since eased off and newer developments, such as
Campbell Heights, are witnessing downward pressure on pricing due to the
abundance of land opportunities in that market. Older well-established areas
are also seeing downward pressure but are not anticipated to experience any
significant movement in prices," notes Lecky. "Overall, land sales are being
dramatically impacted by the capital markets and there continues to be a lack
of interest in financing any land deals unless prelease commitments are in
place. Generally, those who are selling are doing so out of necessity."
    "If there is weakness in the industrial market, it could be the continued
disconnect between market lease rates and the cost to produce new product,"
points out Gritten." Given lease rates are on a slight decline due to tepid
demand, this implies land values, together with already decreasing
construction costs, must decline."
    On the investment side, deal velocity remains stagnant due to the limited
supply of product available for sale and because vendors have not yet met
buyers' expectations for upward capitalization rate movement. However,
industrial investments continue to be "at the top of active investors' product
preference lists," according to Gritten.
    "While industrial properties achieved record sale prices in 2008, peaking
in August and September 2008, worldwide financial turbulence began to
contaminate perception in the market in late 2008. Since then, both buyers and
sellers have been trying to determine the effect of the global credit and
confidence crisis on Metro Vancouver industrial property values," he says.
    Over the past couple of years, the average value of an industrial
building has risen considerably, with offerings in mid-year 2008 reaching a
record $150 to $170 psf for well-situated, single-tenant buildings. The
strength of the strata market was significant in 2007 and 2008 with units
asking $180 to $295 psf in 2008- up 60% over the previous three years and 100%
over the previous five years.
    Gritten continues: "In 2009, average values are expected to drop
moderately, with land and building costs decreasing. As capitalization rates
and yields in 2008 represent pre-market collapse, an uptick of 50 to 150 basis
points is anticipated in 2009, depending on location, quality and covenant
strength. Affected by the lack of confidence, owner-operators are likely the
most nervous right now, and user-demand is expected to remain soft until
perception changes."
    He says opportunities to acquire industrial properties not normally
available are anticipated to appear through 2009, but not at the discounts
expected by most buyers. "Solid well-located, well-tenanted properties will
continue to be most sought after, but while there were still cases of multiple
offers for quality sale product in 2008, this will not be the case in 2009."
    According to the report, 2008 was the year that closed out the massive
run-up in land prices, strata prices, vacant building prices and lease rates.
And the major driver was land. Demand was robust, but activity was low due to
lack of product available.
    "Lack of confidence, hesitant decision-making, projects under
construction, and longer lease-up times for newer space will likely push up
the vacancy rate by year-end, with sublease space continuing to be an issue.
However, the relative shortage of available quality product in the region
should temper the rate of increase. Rents are anticipated to remain flat
through 2009 or decline slightly," notes Gritten. "With vacancy rates still
the lowest in Canada, Vancouver remains a landlord's market for most product
type/sizes, even when you take into account the increase in sublease
opportunities."
    Adds Lecky: "Infrastructure projects currently under construction,
including the South Fraser Perimeter Road, Golden Ears Bridge, and the
Deltaport Third Berth Project will continue to support demand. The chronic
shortage of serviced and zoned industrial land will also continue to drive the
market and reduce the potential of any major declines in rental rates and land
prices. Sound market fundamentals will also sustain investor interest."
    "In spite of the tighter lending environment and cold recession winds
from the U.S., the Canadian banking system is rated the strongest in the
world, large pools of capital continue to be available to qualified
purchasers, the local commercial real estate market is not overbuilt, and
Metro Vancouver's vacancy levels still rank among the lowest in North America.
Once global economic recovery occurs and confidence returns, the region's
industrial market is expected to flourish once again," says Gritten.
    Founded in 1978, Avison Young is Canada's largest independently-owned
commercial real estate services company and the only national, Canadian-owned,
principal-managed real estate brokerage firm in the country.

    
    Editors/Reporters:
    ------------------
    -   Avison Young Spring 2009 Metro Vancouver Industrial Review, full
        report:
    http://www.avisonyoung.com/library/pdf/Van_Research/Indust_Spring_09.pdf

    -   Photos for Media use:
    http://webx.newswire.ca/click/?id=ba25d8c6a2c6dd7

    If you are unable to open the links, please contact Sherry Quan for PDF
    versions. Thank you.
    





For further information:

For further information: Sherry Quan, Director of Corporate
Communications (B.C.), Avison Young: (604) 647-5098, cell: (604) 726-0959;
Robert Gritten, Principal, Avison Young: (604) 687-7331; John Lecky,
Principal, Avison Young: (604) 687-7331; www.avisonyoung.com

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