Doubling of mortgage rates and soaring construction costs – up to 30 per cent higher in the past year – challenge the viability of developing industrial space for sale
The rising cost of industrial space in Metro Vancouver hits close to home for Josh Gaglardi, president of Orion Construction Corp. in Langley.
A design-build firm working with developers of strata industrial units, Gaglardi has worked to keep ahead of escalating prices so developers can maintain margins while keeping prices attractive.
But to do so, he’s also purchased materials in advance, keeping ahead of cost increases and supply chain disruptions so materials are on hand when needed. But that has entailed buying extra space for his business, a good investment but an increasingly expensive one.
Orion recently committed to a second unit in a project it was building as its needs grew and the price was up 30 per cent from when it bought its first unit.
“We’ve seen more challenges in securing this type of property,” Gaglardi said. “Even earlier in this inflationary cycle, pricing was not super-affordable. It’s just become less affordable.”
Orion’s Link 200 project at 200 Street and 56 Avenue in Langley has seen costs increase 30 per cent, pushing pricing from $450 to $655 per square foot – an increase of 50 per cent to the end-user.
This has given many purchasers, particularly those buying as an investment, pause.
“There’s less urgency,” said Jason Kiselbach, managing director with CBRE Ltd. in Vancouver. “The past couple of years, a lot of those strata projects were selling out prior to even starting construction. We’re not necessarily seeing that right now.”
Purchasers, including the investors who represent about a third of the market, need to understand the new market dynamic in play, particularly as interest rates continue rising. CBRE reported that average sale prices hit $640 a square foot in the second quarter, up 11 per cent since March – an increase greater than anywhere else in the country.
“Now it’s on the purchasers to say, if that’s the price and interest rates have gone up, what’s my monthly mortgage cost, and how does that compare to the alternatives?” he said. “But we’re still at 0.6 per cent vacancy, so there aren’t a lot of alternatives, either.”
Beedie Industrial vice-president Beth Berry is also seeing buyers take a second look at the numbers. Buyers in the strata projects Beedie develops typically take larger units and are well-capitalized. Many buy with financing from the Business Development Bank of Canada, which offers a high loan-to-value ratio based on a company’s balance sheet.
“Our strata buyers are, consistently, very well-established, for the most part private local businesses,” she said. “It’s a great investment in their business and stability into the future.”
The well-established nature of the buyers mean that current interest rates aren’t so much a shock as a return to previous conditions.
“In 2015, our purchasers were all paying six, seven per cent interest rates,” she said. “[The current] interest rate wouldn’t be far from what they were used to.”
A study Colliers International undertook earlier this year found that the industrial strata market is capable of riding out the mortgage rate hikes, which have nearly doubled commercial financing rates since the start of this year.
“Industrial strata projects in [Metro] Vancouver continue to see record-breaking pricing, even with rising interest rates,” said Susan Thompson, associate research director with Colliers in Vancouver. “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 owner-occupiers, are more exposed to interest rate hikes. The current quarter will be a transitional period, particularly as the four successive interest rate hikes this year begin to impact sales activity.
She added that some developers are pausing industrial strata projects, but she didn’t give specifics.
Meanwhile, seasoned developers are forging ahead with projects. One of the largest is a Conwest Group project totalling 250,000 square feet on No. 3 Road in Richmond.
More recently, PC Urban Properties and Nicola Wealth acquired 2660 Barnet Highway in Coquitlam in June for $24 million with a view to developing 100,000 square feet of small-bay strata product for both owner users and investors.