With near-zero vacancy and skyrocketing rental costs, the benefits of buying office space outweigh fears of higher mortgage rates
Strata – where space is sold rather than rented – now dominates both speculative industrial development and transactions in Metro Vancouver and the trend seems immune to rising mortgage rates.
Metro Vancouver now has the lowest industrial rate in North America, at 0.1% in the second quarter of 2022, according to research by Colliers. Rental rates, now at $20 per square foot, are double what they were before the pandemic and have increased 22% over the past year.
Colliers launched a study this year to assess the potential impact of rising interest rates and inflation on Vancouver’s office and industrial markets, according to Susan Thompson, associate director of Vancouver research at Colliers.
He found that the industrial strata market is able to ride out mortgage rate hikes, which have nearly doubled commercial financing rates since the start of this year.
“Industrial Strata Projects in [Metro] Vancouver continues to see record prices, even with rising interest rates,” Thompson said. “However, Strata developments in the Fraser Valley are facing more uncertainty with rising interest rates and rising construction costs”
Thompson noted that smaller or nascent industrial strata developers, especially those targeting investors rather than homeowners, are more exposed to interest rate hikes.
“Developers with deeper pockets can get by,” she said.
“It’s a transitional quarter,” Thompson noted. “Colliers is studying the market to determine if there will be a pause or decline in market conditions. Q2 stats continue to show market prices on the rise, but some occupiers and developers are watching with caution[l’environnement changeant]regarding future real estate decisions.”
Thompson said some developers are blocking industrial strata projects, but she declined to be specific.
Meanwhile, seasoned developers are moving forward with projects.
Three of the five largest industrial developments under construction in the metropolitan area are strata projects. One of the largest of these is a 250,000 square foot Conwest Group building on No. 3 Road in Richmond.
The latest is from PC Urban Properties and Nicola Wealth, who have partnered to acquire 2660 Barnet Highway in Coquitlam this month for $24 million. The 3.48 acre site will be used to develop 100,000 square feet of small bay industrial strata products for owner-users and investors.
“With rising rental rates and perpetually low availability, this project could very well still be hitting record highs. [strata] prices, even in a rising interest rate environment,” Colliers noted in its Q2 2022 Metro Vancouver Industrial report.
“The rise in interest rates itself will not necessarily have a strong immediate impact on the industrial sector. Many rental opportunities see multiple offers from well-established companies and consistently achieve rental rates of over $20 per square foot,” the report adds.
The price of industrial strata space will average $590 this year, according to a CBRE study in the first quarter, compared to $390 in 2020, but can easily exceed $800 per square foot for prime projects in good locations.
Other analysts agree that investing in industrial condos looks solid.
“Metro Vancouver [industrial] condominium prices may appreciate less quickly and eventually stabilize, but are unlikely to come under downward pressure,” said Avison Young, Vancouver, who predicts rental rate growth will be “significant in the future “.
The Avison Young Q2 2022 report added, “Prevailing tight market conditions will continue to support the development of stratified industrial spaces, which will remain in high demand.”