Nov 30, 2013 - elevated vendor expectations and close a deal. With just .... component and modernized production, distri
Vancouver
Industrial Report Winter 2014
Evolving industrial market slowed by land-use misconceptions
V
ancouver’s evolving industrial real estate market remained active for most of 2013 despite a growing number of opportunistic vendors seeking to maximize the real (or perceived) value of their holdings. While deal velocity remains comparable with previous years, dollar volume diminished considerably in 2013 compared with the market peak in 2012 as fewer properties of scale transacted due to the declining availability of such assets. Hesitation by vendors seeking to ‘make the market’ with each transaction also limited sales volume as many property owners held out for stronger pricing that may or may not have reflected market reality. Misconceptions around potential land-use options for industrial properties in Vancouver appeared to have influenced vendor thinking and somewhat distorted sales velocity and dollar volume in 2013. Despite strong indications to the contrary, many owners remain convinced that residential or mixed-use development could and will eventually occur on their property. Vendors are astutely aware there is a finite amount of land and want to ensure they receive maximum value. This mindset has proven frustrating for
purchasers who have sought to take advantage of low-cost debt to step up to meet already elevated vendor expectations and close a deal. With just $83.6 million in 60 transactions recorded by year-end 2013, Vancouver industrial deals in 2013 will reflect the lowest dollar volume since 2010 ($80.1 million). Deal activity remained comparable with previous years (except 2012, which recorded 74 transactions and $119.1 million in proceeds due to the disposition of units in new strata developments such as Rivershore Business Park and Shoreline Business Centre). Vacancy rose slightly to 2.5% in fall 2013 from 2% a year earlier, but remains exceptionally tight with only industrial markets in North Vancouver (2.3%) and Surrey (2.3%) achieving lower vacancy rates in Metro Vancouver. The rise in vacancy is attributed to turnover in existing buildings that are physically obsolete and remain unoccupied. Virtually no new industrial lease product is set for delivery in the next six to 12 months and vacancy is expected to remain tight. Demand for new medium-bay lease product is strong, but land costs remain prohibitive for developers to make
2007 - 2013
$80 $ Million
Number of Transactions
$100
Cap Rates
Industrial Vacancy
Sales Volume
74
$120 #
Market Outlook
Absorption
$140
#
Transaction Summary p. 2 Vancouver submarket rates p. 3 Deal Tracker p. 4
continued on page 4
Vancouver Industrial Real Estate Sales Transactions
#
Inside
50 59
60
46
48
Lease Rates
$60 $40
36
$20 0
Partnership.Performance.
2007
2008
2009
2010
2011
2012
2013 I 1
Owner/users drive sales activity while leasing cools due to lack of supply
John Lecky, Principal 604.647.5061
[email protected] John specializes in industrial sales and leasing transactions throughout Metro Vancouver, providing corporate real estate advisory services that focus on asset disposition, tenant mandate and design-build assignments.
Struan Saddler, Senior Associate 604.647.5077
[email protected] Struan focuses on servicing industrial owners and tenants in the city of Vancouver who are close to Downtown. He has been involved in more than $100 million of office/industrial asset transactions during his five-year tenure at AY.
Davis Trading & Supply purchased 1539 & 1575 Vernon Drive (above) for $8.5 million.
I
approximately 5,000 sf at 259 East 7th Avenue.
ndustrial leasing activity has cooled in Vancouver as there remains a lack of quality buildings available. Several of the larger lease transactions in 2013 occurred in South Vancouver. Sevco Enterprises Ltd., a food products distributor, leased a total of 26,264 sf at 403 East Kent Avenue and Lush Cosmetics, a bath and body products manufacturer and distributor, relocated into 16,972 sf at 8250 Manitoba Street. Golden Trim Enterprises, a hardwood flooring distributor, leased 8,500 sf at 234 West 3rd Avenue, and Vancouver Community Lab, a non-profit workshop, leased 7,622 sf on two floors at 1907 Triumph Street. The zoning amendment which now permits breweries to incorporate a tasting room and a retail off-sales component has led to an influx of local craft breweries into the Mount Pleasant and Powell Street industrial areas. 33 Acres Brewing leased 7,618 sf at 15 West 8th Avenue, Bomber Brewing leased 7,064 sf at 1488 Adanac Street, Brassneck Brewing leased 5,800 sf at 2148 Main Street and Main Street Brewing leased
Industrial lease rates have increased slightly in Vancouver as lack of supply has increased pressure on lease rates. Overall, industrial lease rates in Vancouver continue to be higher than rates in the majority of other Metro Vancouver submarkets. On the sale side, Davis Trading & Supply Ltd. purchased the neighbouring property immediately to the south, 1539 & 1575 Vernon Drive, for $8.5 million. The building was completely vacant and it is currently being marketed for lease. Cool Air Rentals Ltd. purchased 1407 East Georgia Street for $4.84 million. The property consists of 22,618 sf on a 0.81-acre site, and Cool Air currently utilizes the property for its own use. A.T. Storrs Ltd. purchased 23,000 sf in two buildings at 1353 East Pender Street, and currently utilize one of the buildings for its own use. Pacific Restaurant Supply relocated from a leased premises on East Hastings Street to an owned premises at 1020 East Cordova Street. The 18,506-sf property was acquired for $2.9 million. Los Beans Trading Co. purchased 467 Alexander Street for $2.85 million.
notable vancouver industrial lease transactions ADDRESS Kevin Kassautzki, Associate 604.646.8393
[email protected] Kevin specializes in industrial leasing, sales and investment transactions. His analytical approach to the underlying economics of a transaction plays a crucial role in building sound business cases for any leasing or sale decisions made by a client.
Partnership.Performance.
TENANT
SQUARE FEET (SF)
Sevco Enterprises Ltd.
403 East Kent Avenue
26,260
Lush Cosmetics
8250 Manitoba Street
16,970
Golden Trim Enterprises
234 West 3rd Avenue
8,500
Vancouver Community Lab
1907 Triumph Street
7,620
33 Acres Brewing Co.
15 West 8th Avenue
7,620
Bomber Brewing
1488 Adanac Street
7,060
Brassneck Brewery
2148 Main Street
5,800
Main Street Brewing
259 East 7th Avenue
5,000 I 2
Industrial vacancy and asking lease rates in Vancouver Vancouver Port Lands Vacancy Rate: 1.6% Net Lease Rate Range: $6.00 – $16.00 Median: $10.50 – $11.16 Operating Costs Range: $2.00 – $8.23 Average: $4.41 Median: $3.80
Mount Pleasant
East Vancouver
Vacancy Rate: 2.9%
Vacancy Rate: 3%
Net Lease Rate Range: $9.25 – $18.00 Median: $10.00 – $12.15
Net Lease Rate Range: $5.25 – $15.00 Median: $9.91 – $10.00
Operating Costs Range: $4.00 – $9.00 Average: $5.62 Median: $4.98
Operating Costs Range: $3.45 – $6.71 Average: $5.06 Median: $4.90
South Vancouver Vacancy Rate: 3.9% Net Lease Rate Range: $6.50 – $11.50 Median: $9.00 – $9.34 Operating Costs Range: $2.10 – $8.98 Average: $4.57 Median: $3.90
Rental rates in Vancouver remain one of the highest in the region despite the ongoing presence of inefficient, physically obsolete industrial buildings.
Absence of institutional investors reflects need to permit industrial revitalization efforts
I
nstitutional investors remain largely absent from Vancouver’s industrial areas with the exception of the South Vancouver submarket where some industrial strata product has been developed and sold. The transition of the Vancouver industrial market from traditional, functionally obsolete building types and uses to a post-industrial scenario that includes more flex office space combined with a retail component and modernized production, distribution and repair (PDR) facilities, may begin to attract interest from institutional investors. If developers are able to assemble many of the small, inefficient industrial buildings that dominate the East Vancouver and Mount Pleasant industrial submarkets, suitable product could be developed that would Partnership.Performance.
attract institutional investment. The demand for industrial product remains strong in Vancouver; however, the form and function needs to be updated as much of the inventory is challenged from a tenant perspective. By not permitting industrial land to be rezoned to its best and highest industrial use, the city is locking in place a functionally obsolete stock that will ultimately require redevelopment or remain vacant or under utilized. Combining light industrial uses and/or PDR facilities within mixed-use developments does not preserve traditional industrial employment and needs to be carefully considered if industral activity is truly to remain a component of Vancouver’s economy. I 3
vancouver industrial sales transactions (>$1 million) December 1, 2012 to November 30, 2013 ADDRESS
MUNICIPALITY
TRANSACTION VALUE
SQUARE FEET (SF)
PER SQUARE FOOT (PSF)
DATE
333-341 West 6th Avenue
Vancouver
$3,100,000
7,496
$414
November 2013
1481 Venables Street
Vancouver
$1,150,000
3,790
$303
September 2013
1362-1386 Venables Street
Vancouver
$4,080,000
21,242
$192
September 2013
626 Alexander Street
Vancouver
$1,550,000
7,760
$200
September 2013
1570 Clark Drive
Vancouver
$1,725,000
7,600
$227
September 2013
467 Alexander Street
Vancouver
$2,850,000
9,175
$311
August 2013
1146 Union Street
Vancouver
$1,200,000
6,250
$192
August 2013
1829-1835 Pandora Street
Vancouver
$1,345,000
7,000
$192
July 2013
915 Cotton Drive
Vancouver
$1,650,000
7,800
$212
July 2013
Shoreline Business Centre - Phase II
Vancouver
$2,549,688
13,708
$186
June 2013
1136 Franklin Street
Vancouver
$1,140,000
3,271
$349
June 2013
1978-1988 Triumph Street
Vancouver
$2,163,000
16,302
$133
June 2013
1353 East Pender Street
Vancouver
$4,000,000
23,000
$174
June 2013
1539 & 1575 Vernon Drive
Vancouver
$8,500,000
26,320
$323
May 2013
1020 East Cordova Street
Vancouver
$2,900,000
18,506
$157
May 2013
645 East 16th Avenue
Vancouver
$1,170,000
4,971
$235
April 2013
1626 Venables Street
Vancouver
$1,415,000
4,940
$286
April 2013
1109 Venables Street
Vancouver
$1,115,000
2,500
$223
April 2013
1407 East Georgia Street
Vancouver
$4,840,000
22,618
$214
February 2013
895 East Hastings Street
Vancouver
$2,488,000
10,350
$240
February 2013
27-29 West 6th Avenue
Vancouver
$1,549,500
3,253
$476
February 2013
1104 Clark Drive
Vancouver
$1,512,000
4,716
$321
February 2013
43 East 3rd Avenue
Vancouver
$3,200,000
11,830
$270
February 2013
701 East Cordova Street
Vancouver
$1,650,000
11,668
$141
December 2012
2110-2180 Skeena Street & 3525 Lougheed Highway
Vancouver
$11,000,000
54,100
$203
December 2012
continued from page 1
the numbers work. Any new product being delivered is generally build-to-suits for owner/occupiers. Suitably zoned industrial land remains in extremely short supply. The nature of Vancouver’s industrial market continues to shift away from light manufacturing and small-scale logistics/distribution towards more serviceorientated and flex office uses. With some exceptions such as high-tech ‘manufacturing’ and small-scale home-decor design and production facilities, industrial users are increasingly seeking a retail or showroom component that can permit and facilitate retail or wholesale transactions onsite. Capitalization rates have remained flat in the Vancouver industrial market and tend to mean less to local purchasers as an economic metric due to the large segment of private owner/users in the market who value the utility they can derive from a property and who are not necessarily as concerned with returns. National and institutional investors may not understand the cap rates achieved in the Vancouver industrial market as they often lack the supporting fundamentals that typically influence rates of return. Local investors flush with private equity often accept low yields in the short term in order to obtain potentially high yields in the long term. Development potential also remains a potent driver of local investment activity. Deal velocity in 2014 is expected to remain consistent with the sales activity recorded in 2013. There will continue to be a gap between vendor and purchaser expectations as long as the cost of capital remains low. Sale pricing will remain elevated as opportunities will remain in short supply and vendors will not feel urgency to try and time the market. Clarification by city officials around planning and rezoning decisions will also provide direction to those industrial land owners who are currently under the mistaken assumption that their property can be rezoned for residential uses. Such information would serve to temper vendor expectations and improve deal flow.
Industrial Team Saundra Bahrini 604.647.1345
[email protected]
Jake Luft 604.647.1340
[email protected]
Kyle Blyth 604.647.5088
[email protected]
Bennett Lutes 604.646.8382
[email protected]
Jeron Dillon 604.647.1330
[email protected]
Douglas McMurray 604.647.5082
[email protected]
John Eakin 604.646.8399
[email protected]
Gord Robson 604.647.1331
[email protected]
Michael Farrell 604.646.8388
[email protected]
Struan Saddler 604.64.5077
[email protected]
Rob Gritten 604.647.5063
[email protected]
Dan Smith 604.646.8397
[email protected]
Kevin Kassautzki 604.646.8393
[email protected]
Terry Thies 604.646.8398
[email protected]
Ryan Kerr 604.647.5094
[email protected]
Matt Thomas 604.646.8383
[email protected]
John Lecky 604.647.5061
[email protected]
Ian Whitchelo 604.647.5095
[email protected]
For more information please contact: Michael Keenan, Principal & Managing Director Direct Line: 604.647.5081
[email protected] Andrew Petrozzi, Vice-President, Research (BC) Direct Line: 604.646.8392
[email protected]
Avison Young Commercial Real Estate Inc. #2100-1055 W. Georgia Street Box 11109 Royal Centre Vancouver, BC V6E 3P3, Canada
avisonyoung.com © 2014 Avison Young (Canada) Inc. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young Commercial Real Estate (BC) Inc.
