Recovery taking root in Metro Vancouver industrial market

New strata and some speculative construction emerging to satisfy tenant and owner-user appetites for expansion

VANCOUVER, May 3 /CNW/ - Strong debt markets and constrained supply defined the recovery of the Metro Vancouver industrial market in 2010 and continues attracting investor capital in the battle to achieve yield in 2011.

With the BC and Canadian economies forecasted to achieve in excess of 3% annual GDP growth in the year ahead, investor demand remains high for industrial product. New strata and some speculative construction are emerging to satisfy tenant and owner-user appetites for expansion.

These are some of the key trends noted in Avison Young's Spring 2011 Metro Vancouver Industrial Overview, released today.

"With a slight increase in the value of Canadian treasuries during the past six months, offset to some degree by the compression in the premium charged by lenders, capitalization (cap) rates that typically trade in a very narrow range (about 200 basis points) higher than the Canadian benchmark interest rate, have thus far lessened the impact of a slightly increased lending rate," comments Avison Young Principal Rob Gritten. "In short, until we see a sustained increase in interest rates, we will not see a corresponding increase in cap rates."

According to the semi-annual report, pent-up demand propelled industrial deal velocity in 2010, particularly in the second half of the year. This increased activity is anticipated to continue in 2011 as cap rate compression stagnates, and given that interest rates will not start trending upwards until inflationary pressures build.

"When interest rates rise to an extent that effectively ends cap rate compression - and triggers upward movement more in line with its historical trading range vis-a-vis the lending rate - the subsequent impact on the Metro Vancouver industrial market could affect deal and dollar volume," says Gritten. "Velocity of activity will likely fall because vendors will not react to lower pricing expectations of buyers based on higher debt costs."

According to Avison Young Principal John Lecky, more industrial tenants are looking for relocation opportunities as the market outlook improves.

Renewed economic confidence is also generating investor interest in industrial real estate, he says, but that enthusiasm may be tempered by a limited supply of available real estate product.

"The mindset of vendors is that - by and large - they are happy with their industrial real estate holdings," comments Lecky. "In order to motivate them to transact a scarce commodity like Metro Vancouver industrial real estate, cap rate compression is necessary."

Industrial vacancy tightens year-over-year in Metro Vancouver
Metro Vancouver's industrial vacancy rate continues trending lower year-over-year as the lack of land and new development pushes lease rates, as well as deal and dollar volumes, higher. Overall vacancy currently sits at 4.5% compared with 4.7% in spring 2010. The vacancy rate remains above the 2.4% recorded in fall 2008, when vacancy rose above 2% for the first time since early 2006.

Significant positive absorption in industrial parks such as Gloucester Industrial Estates in Langley and Campbell Heights Business Park in Surrey has demonstrated pent-up demand for industrial real estate of all types, including freestanding, strata and lease product.

"Vacancy will remain low going forward due to a measured increase in speculative supply brought on stream by the handful of large developers that control the majority of the land-constrained Metro Vancouver industrial market," says Gritten.

Mortgage payments versus rental rates
With rental rates likely increasing and interest rates remaining low, mortgage payments could prove to be more cost effective than monthly rent in 2011. Vendors of presale or finished product are maintaining price expectations so users are only making purchases after careful due diligence. Developers are only acquiring land where pricing meets the cost to deliver at retail after servicing, subdivision, and development costs.

"You are going to see more construction in 2011," says Lecky. "The combination of low interest rates and increasing land and construction costs provokes users to seriously contemplate strata ownership versus lease obligations."

Land prices driving demand for strata
Strong demand and a constrained supply of new industrial product combined with the low cost of borrowing have caused demand for strata industrial space to spike in recent years. Until interest rates appreciate considerably, the trend is expected to continue in a market where land remains at a premium.

Gritten adds: "Owning real estate is an inflationary hedge and with such pressures building in the short to medium term, the option to purchase is appealing to many owner-users."

Avison Young's Spring 2011 Metro Vancouver Industrial Overview features a detailed primer on Metro Vancouver's proposed Regional Growth Strategy (RGS) as well as a Q&A panel discussion with Burnaby Mayor Derek Corrigan; the Beedie Group's vice-president of land development, Dave Gormley; and Coquitlam Mayor Richard Stewart. All three discuss and debate the merits or drawbacks of the impact of the RGS on industrial land development in the region.

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. Headquartered in Toronto, Ontario and ranked among Canada's leading national commercial real estate organizations, Avison Young is a full-service commercial real estate company comprising more than 700 real estate professionals in 23 offices across Canada and in the U.S. The company provides value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-residential properties.

Editors/Real Estate Reporters
∙ Please click on link to view Avison Young's Spring 2011 Metro Vancouver Industrial Overview:

SOURCE Avison Young (Canada) Inc.

For further information:

For further information/comment/photos:

  • Andrew Petrozzi, Research Manager, Vancouver, Avison Young: (604) 646-8392
  • Rob Gritten, Principal, Avison Young: (604) 647-5063
  • John Lecky, Principal, Avison Young: (604) 647-5061
  • Sherry Quan, National Director of Communications & Media Relations, Avison Young:
    (604) 647-5098; cell: (604) 726-0959

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