Real estate investor interest in strata commercial projects has cooled as high per-square-foot prices and rising interest rates make rentals a questionable cash flow, commercial agents say.
Strata industrial is a relatively new concept wherein the space is sold, like a residential condo, rather than leased. Such developments have come to dominate industrial development in Metro Vancouver, where 7.7 million square feet of space is under construction.
Three of the five largest industrial developments underway in the Metro region are strata projects. One of the largest of these is a Conwest Group building on No. 3 Road, Richmond, at 250,000 square feet.
PC Urban Properties is building 185,000 square feet of strata industrial in Surrey.
The latest is by PC Urban Properties and Nicola Wealth, which partnered to acquire 2660 Barnet inate industrial development in Metro Vancouver, where 7.7 million square feet of space is under construction. Three of the five largest industrial developments underway in the Metro region are strata projects. One of the largest of these is a Conwest Group building on No. 3 Road, Richmond, at 250,000 square feet. PC Urban Properties is building 185,000 square feet of strata industrial in Surrey. The latest is by PC Urban Properties and Nicola Wealth, which partnered to acquire 2660 Barnet Highway in Coquitlam in September for $24 million. The 3.48- acre site will be used to develop 100,000 square feet of smallbay industrial strata product for owner users and investors.
The strata space is touted to allow businesses to acquire workspace and enjoy the benefits of real estate appreciation combined with a set monthly mortgage cost, rather than being exposed to rising lease rates. The average industrial lease rate in Metro Vancouver increased to a record high of $20.44 per square foot in 2022’s third quarter, compared with $17 per square foot at the start of the year, and up from around $13 per square foot a year earlier, according to Colliers.
These are annual leases, not monthly as in residential. For example, a 5,000-square-foot industrial space would generate about $100,000 in rental income at today’s average lease rate.
Many speculative developers, however, also bank on investors buying a portion of the strata space and renting it out to owner-occupiers.
That concept is now nearly dead, agents say.
“It is a challenge for strata investors today,” said Kelvin Luk, principal of Luk Real Estate Group with Macdonald Commercial in Vancouver.
Purchasers, including the investors who represent about a third of the market, are dealing with a different environment, particularly as interest rates continue rising. CBRE reported that average strata sale prices hit $640 per square foot in the second quarter, up 11 per cent since March – an increase greater than anywhere else in the country. In parts of Vancouver, strata industrial-office space is selling for north of $800 per square foot.
Even with the record-high leases, investors face problems generating positive cash flow by leasing out strata commercial space, Luk said, adding that the cost of financing adds a recent, steep barrier.
On Oct. 26, the Bank of Canada raised its overnight lending rate to 3.75 per cent in the sixth rate increase this year.
While owner-occupiers may qualify for between 80 and 100 per cent financing of their strata commercial space, an investor would be required to put down between 30 and 50 per cent and would also be subject to higher lending rates, Luk said.
Luk added that high land costs have persuaded industrial developers to build the multi-storey projects, but “it is hard to sell or lease space above the ground floor.”
William Maunsell, an associate vice-president at Luk Real Estate Group, suggested several planned commercial strata projects are being scaled back or delayed as investor demand wanes, though he could not point to specific locations.
Maunsell said an outlier is strata medical office space, which he said remains a top seller to both owner-occupiers and investors, especially in Vancouver. ■