With a severe scarcity in lands that can be used to develop new industrial buildings, the only way to create a dent against Metro Vancouver’s industrial shortage may be to build up.
A new report by Colliers International examines the possibility of multi-storey warehouses in the region, citing proven examples in dense urban centres in Asia and increasingly in Europe and elsewhere in North America where land also comes at a premium.
The industrial vacancy rate is at historic lows, hitting 2% at the end of 2018 — some of the lowest industrial vacancy rates in North America. Earlier in the year, the uptick was marked as the world’s largest industrial rental rate increase.
“In each of the global cities where multi-storey distribution facilities have been built or are planned to be built, there is a combination of strong demand for space, a constrained industrial land supply, and a requirement for high-quality distribution space close to a metro population centre,” reads the report.
“Given these factors of strong demand and limited supply, however, industrial land in proximity to metro population centres tends to be very expensive. In addition, the cost to design and build a multi-storey warehouse is high.”
It is suggested that the current industrial scarcity has increased the economic viability of constructing more expensive multi-storey buildings. While such buildings provide more overall usable space, they are less efficient in design, given space requirements such as ramps.
“In addition to a requirement of higher than typical lease rate, depending on the amount of density and existing market dynamics, the size of the site must be large enough to create economies of scale to allow for the less efficient use of land per storey,” adds the report.
“If an adequately high lease rate is achievable, then it allows a developer to increase the site’s development potential by going vertical, creating much needed supply and making the economics of purchasing expensive industrial infill land in supply constrained markets economically viable.”
Warehouse distribution centres in Asia are as high as 12 storeys, and the tallest facility in Asia is a 22-year-old facility in Hong Kong with 22 storeys.
In Seattle, the recently completed Georgetown Crossroads complex was the first multi-storey warehouse complex to be built in the United States, with stacked industrial distribution space on the first and second storeys connected by ramps for truck loading operations.
Home Depot has been confirmed as the first tenant in the development, taking 97,000 sq. ft., and Walmart and Amazon are said to be interested as well.
Recent new and proposed smaller-scale, light industrial developments in Vancouver have been creatively accommodated within mixed-use projects that accommodate office space within the upper levels. Examples of this type of development are Chard Development’s 34/ W7 and The Yukon projects, as well as PC Urban’s Evolution, which are all located in Mount Pleasant.
These mixed-use developments were spurred by a recent City of Vancouver zoning amendments for Mount Pleasant and Railtown that increased the flexibility for the types of office uses permitted and increased the amount of office space relative to industrial space, which are largely flex spaces for creative manufacturing uses, such as clothing design, furniture design, industrial design, and technology equipment design.
In a few rare instances, industrial space sits below residential spaces — namely the recently completed Strathcona Village complex and the proposed Mount Pleasant development at 220 East 1st Avenue on Main Street.
Metro Vancouver’s real land scarcity is compounded by restrictions by the provincial government’s agricultural land reserve that hinder the ability for industrial lands to expand.
More importantly, municipal governments lack zoning discipline, as they have been actively rezoning industrial land to residential and other non-industrial purposes, which resulted in a loss of 1,268 acres of industrial land between 2010 and 2015 alone.
Municipal governments are generally keen on such non-industrial rezonings due to the increased property tax revenue, particularly from residential developments.
Moreover, the current level of industrial supply does not only fail to meet existing demand but also the future demand, based on growing e-commerce trends. E-commerce sales in Canada hit US$29.6 billion in 2015 and are expected to reach US$44 billion in 2019.
“As a result of this shift [to e-commerce], there is growing demand for logistics and ‘last mile’ fulfillment centres able to cater to customer expectations around delivery timeframes,” continues the report.
“Like many of these global cities, Metro Vancouver’s industrial market is experiencing the pressures of a booming e-commerce sector, as well as record demand generally and highly constrained supply – resulting in many in the industry believing it’s a matter of when, and not if, we will witness developers proposing this type of solution for our local market..”
The projected growth in regional population will also result in a higher demand for goods and services, which in turn requires more warehouse and distribution spaces.
Other major factors that will add even greater demand pertain to increasing cargo volumes through the Port of Vancouver and the booming film and television production’s industry usage of industrial space for studios.
The report emphasizes the importance of having warehouses and distribution centres near population centres. Within Metro Vancouver, the typical lease costs are typically less than 5% of the total supply chain costs, but the transportation costs are typically around 50%.
Any increase in supply chain costs — including fuel costs from transportation — are, of course, passed on to the consumer.