The COVID-19 pandemic has profoundly impacted Vancouver’s real estate market, and often in one specific direction: residential activity has gone through the roof, while retail, hospitality and office activity have all had to contend with uncertainty as businesses struggle to adapt.
There’s one big exception to the commercial real estate market upheaval: Vancouver’s industrial sector is seeing significant growth in market activity and a renewed round of interest from builders and investors.
In a recent example, Hawaii-based Watumull Properties Corp. purchased the Walnut Grove Industrial Park in May for $10 million.
The company already has a presence in Vancouver, but vice president Jared Watumull said the latest purchase is a signal the company is looking to expand its portfolio. The Walnut Grove property was especially attractive because it still has room for growth, he said.
Watumull plans to invest in landscaping, building repairs and parking lot upgrades, but part of what drew the company to the Walnut Grove Industrial Park was a large undeveloped section with room for up to 75,000 square feet of warehouse space near the road, Jared Watumull said. The company thinks it can seek out tenants and get the parcel under development quickly.
The company hasn’t seen any slowdown in Vancouver’s industrial market during the pandemic, he added — and that’s an assessment that other local buyers and builders seem to share.
“It wasn’t smooth sailing for everybody, but for the most part, generalizing, it was strong and continues to be stronger,” said Evan Bernstein, director of leasing and acquisitions at Beaverton-based Pacific NW Properties.
The company purchased the 112th North Business Park in east Vancouver earlier this year, and is building out an industrial project in the Orchards area called Fourth Plain Business Park II, an expansion of its existing multi-tenant industrial space that will roughly double the available area.
The company bought the land for the first half of the business park in 2016, Bernstein said, but decided to hold off on the second half. Pacific Northwest Properties tends to build new projects on a speculative basis — meaning without tenants lined up beforehand — so the project was a bit of a risk at the time, he said. The land was relatively far out east from Vancouver, and lease rates weren’t as high as they are now.
The market in 2021 is a different story. The first half of the park was wildly successful, and the surrounding area has seen a significant influx of both commercial and residential development. The second half of the project is less than halfway through construction, he said, but is already on the verge of becoming about two-thirds pre-leased.
“I don’t think we’ve ever been this high on a pre-lease basis at this stage of construction,” he said.
The pandemic threw restaurants, retailers and offices into disarray, leading to a generally negative impact on most sectors of the commercial real estate market — but the industrial sector is proving to be the exception.
“Occupancies are way up on industrial properties,” said Brett Irons, vice president at Vancouver-based Fuller Group, which brokered the Walnut Grove Industrial Park purchase.
The nature of industrial spaces tended to make them a bit more adaptable to the social distancing requirements of the pandemic, Bernstein said — it’s easier to maintain 6 feet of separation in a sparsely-populated warehouse than a dense row of office cubicles.
Many industrial businesses were also considered essential, he said, and in some cases — particularly shipping and logistics companies — the pandemic dramatically accelerated the demand for their services, prompting a need for greater space. Amazon’s rapid pandemic-era growth tended to grab the most headlines, he said, but many small-scale local industrial operations saw similar boosts.
And even if business isn’t booming, industrial spaces can’t downsize their space in the same way that a white-collar business might, he said. The office world is filled with chatter about new hybrid remote work options and smaller office spaces, but most warehouse users have stayed put during the pandemic.
“We have about 500 tenants in our portfolio,” Bernstein said. “Ninety-nine percent of them never work remotely. You can’t drive a forklift on a Zoom call.”
The industrial sector is strong across the board, but Vancouver has managed to stand out even from the rest of the thriving Portland market. It doesn’t have the highest lease rates in the region, Bernstein said, but it has one of the lowest vacancy rates at less than 2 percent — and lease rates are still rising.
“Vancouver/Clark County is outperforming every single Portland market that we’re in,” Bernstein said. “It’s strong everywhere, market-wide, but that’s probably the tightest.”
The average monthly lease rate for Clark County industrial space used to be about 55 to 65 cents per square foot pre-pandemic, Irons said. It currently stands at about 70 to 75 cents per square foot.
Other companies offered similar estimates. A second-quarter market trends analysis from West Coast real estate firm Kidder Mathews pegged Portland’s overall industrial vacancy rate at 4.4 percent, with an average asking rent of 70 cents per square foot. The Clark County submarket had a vacancy rate of 3.2 percent and an average rent of 67 cents per square foot.
Industrial market demand has been high for years in Clark County, driven by relatively low land availability. Most of the Portland area faces a similar shortage.
“If you need 10,000 square feet of light industrial space in Clark County, there’s three options right now, maybe,” Bernstein said.
That’s part of what makes this level of activity so important, Irons said – the supply constraints are likely to persist for the time being, but demand has reached such a fever pitch that lease rates may finally be high enough to spur a new round of development.
The land shortage has been exacerbated because some of the available industrial land used to be too expensive to pencil out, Irons said. With lease rates on the rise, those properties are becoming more attractive for builders.