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episode # 51

How to Buy a Six Percent Industrial CAP Rate with Bronwyn Scrivens

As interest rates rise, investors are on the lookout for higher cap rate properties but where can you find these assets?

On the show this week Cory and Adam welcome Bronwyn Scrivens from Omada Commercial Real Estate in Edmonton, Alberta to discuss Alberta’s growing industrial market and how that compares to BC’s unprecedented prices.

Bronwyn shares how Alberta is receiving the halo effect from BC’s tight vacancy rates and staggering acquisition costs and what tenants and developers are now looking into when it comes to Alberta vs BC. Cory and Adam’s are left wide-eyed when the cost of land and price per foot of key industrial areas are exchanged and just how much massive growth BC has seen over the years.

As Edmonton and Calgary face off in the second round of this year’s NHL Playoffs, the battle of Alberta is also happening off the ice as both cities look to have bounce back years in 2022 in the commercial real estate world.

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Episode Summary


 

Who is Bronwyn Scrivens? 

I specialize in industrial sales and leasing in the Greater Edmonton region. I started my career here in Edmonton at a big brokerage, Cushman & Wakefield, before transferring to Omada Commercial, a smaller, private brokerage. I studied real estate at Cornell and realized how much I loved working with people, which led me to the brokerage side.

What’s happening with industrial real estate in Alberta?

We are seeing a lot of groups coming from Vancouver to look at industrial real estate in Alberta. The industrial sector was already on the up across Canada before the pandemic, but covid has exacerbated the trends we were seeing. Online shopping is up and people want things on their doorsteps the next day.

Buyers want to be in Vancouver but industrial space availability is an issue. Vancouver is land-constrained, so buyers have to go elsewhere. Calgary and Edmonton have reaped the benefits of that. 

A lot of industrial development happened in Alberta in 2012/2013 thanks to institutional buyers. By the end of 2014, oil and gas were no longer cool. That meant we had a bunch of warehouse space sitting empty for years. We didn’t have the demand that we’re seeing now.

In the last couple of years, as Toronto, Vancouver, Montreal and Ottawa have become tapped out for industrial space, buyers have started looking at Alberta and Manitoba. Because we’re so close to Vancouver, we’re getting a lot of outflow from there. These industrial groups just need space.

Now because our demand is so high, we have the same backlogs in construction that everyone across the country is facing. In Alberta, our vacancy is creeping down and our lease rates are creeping up. 

Was the increase in demand for industrial space in Alberta brought on by covid or was it already happening before the pandemic?

We were starting to see an uptick in demand for industrial space in Alberta before covid; 2019 was a good year for us. When the pandemic first hit, we halted like everyone else did for a few months. But as soon as industrial users realized there was so much demand for space, things really kicked into gear. Many industrial users were also able to stay open throughout the pandemic where a lot of other asset classes had to shut down and relook at their leases.

So industrial was trending up before covid. We were already getting into online shopping and ecommerce. But covid definitely amplified that trajectory.

Has there been a specific industry that has emerged and taken up most of the industrial square footage in Alberta?

We’ve all been recipients of the Amazon effect. In the last three years, Edmonton has opened four new Amazon warehouses covering over 3 million square feet. And with Amazon comes all of the secondary businesses that want to be located near Amazon or that distribute similarly to Amazon.

We primarily had a distribution market before covid, but it used to be products related to our energy industry. Now, we’re seeing a lot more retail distribution in the industrial market, with places like Structube and Hello Fresh. Those tenants needed space yesterday because of their high demand. 

The energy markets in Alberta have been improving over the last 12 months so we are seeing an uptick in our manufacturing base too. The energy industry always been the bread and butter of Edmonton. 

There’s a lot of hype in Alberta. What are people excited about? Why is Alberta so exciting? 

Alberta is awesome! I went to university out of the country but decided to come back to Alberta. Alberta is an affordable place to live, which is very valuable these days. We can build out whatever kind of commercial space people want because we’re not constrained by land. We’re only constrained by timelines, but a lot of municipalities are being proactive to move processes along faster.

A lot of companies are looking at a quality of life component for their employees. Labour is a big problem for companies right now. If an entry-level worker can’t afford to live in your city, that’s going to make finding employees even harder. 

Industrial land in Burnaby costs $6-9 million per acre. What does industrial land just outside of Edmonton cost?

In the industrial hub areas outside of both Edmonton and Calgary, industrial space is going for $550,000 – $650,000 per acre. These massive companies moving into Alberta aren’t just looking at one thing. There are reasons why these companies want to be in Vancouver, like the population and access to the ports. But the cost to be in Vancouver just doesn’t add up. 

What are the lease rates for industrial real estate in Alberta?

If you want to lease an entire 100,000 square foot new building, you’re looking at $9-9.50/square foot net. If you want a two bay deal, closer to 25,000 square feet, that would be $9.50-10.50/square foot net. If you’re looking for something even smaller, like 2,000-5,000 square feet for a local business, that would lease for $9-11/square foot. That may go up to $12-13/square foot if you’re on a main road.

The cap rates are not as compressed here in Alberta as they are in other markets. We’re seeing this in the US too; developers are leaving LA, New York and other major cities because they’re too congested. There’s too much demand. People are looking for alternatives. They’re even trying to connect Canada with Mexico through a rail line that will activate so many new cities across North America. 

Is industrial real estate more expensive in Edmonton or Calgary?

Edmonton is more expensive for leasing industrial space than Calgary. Calgary has always been a more white collar city where the head office for a company might be. But Edmonton is the blue collar city where the manufacturing and service shops will be. So there’s more demand for industrial space in Edmonton than in Calgary. 

For users that are heading north, Edmonton is a more convenient base. Calgary attracts more of the distribution users because they’re one day from Vancouver. 

Edmonton is also a unique hub for Asia because cargo planes can fly from Beijing or Shanghai North to Edmonton in one flight. If they have to go further south, they have to stop. So it’s actually shorter to fly into Edmonton than Vancouver.   

What are the vacancy rates like in commercial real estate in Alberta?

At the end of 2020, after a fairly slow year, we were at about 7% vacancy for industrial space in Edmonton. Now in 2022, Edmonton is at sub 5% vacancy. Calgary is sub 3%. Vancouver is sub 1% but we are getting lower in Alberta. 

There’s 5 million square feet of industrial space under construction in Edmonton and another 6 million in Calgary. But 75% of that is pre-leased. So the demand is certainly here. I think the vacancy rates will continue to creep down. But you do want a little bit of vacancy so people can move around. 

What are the cap rates in industrial real estate in Alberta?

The cap rates in industrial in Alberta are very dependent on the type of asset. We just had a record sale for three Class A distribution products in the Edmonton market. They were brand new, fully tenanted buildings and they sold sub 4.25% cap rate. That was a big sale for our market. 

If you’re looking for an owner-occupier space in the $2-5 million range in the city of Edmonton, you’re probably looking at a 6-6.5% cap rate. Outside of the city, you may get north of 7%. It really depends on the type of tenants, the age of the building and a few other factors. The average cap rate is in the 6’s. 

What is the price per foot for owner-occupier industrial real estate? 

To acquire a brand new unit that is built well and looks good, you’ll be paying $200-235/square foot for the nicest unit. For an older product that doesn’t look as nice, you might be looking at as low as $150/square foot. It really depends on the functionality of the space and on the location of the building. 

We have a big owner-user market here in Edmonton and have less than 1% vacancy in some submarkets. Owner-users will pay up to $275/square foot to be in those really desirable areas. 

Cory: In contrast, Port Coquitlam, which is about an hour outside of Vancouver, brand new industrial is selling at $725/square foot. 

Who is buying industrial real estate in Alberta?

We’re seeing interest in industrial real estate in Alberta from a number of different groups. There has always been a good amount of demand from local Albertans but there’s been a big uptick in groups from other provinces as well. We’re seeing a lot of owner-users who are being encouraged to buy, instead of lease, in order to have more control. 

Tenants are also seeing the appeal of newer buildings, more options and cheaper prices in Alberta. We’re seeing institutional developers and buyers, as well as smaller developers and buyers. Everyone across the country is looking for opportunity zones. Alberta checks a lot of the boxes.

We have a very skilled labourforce here, thanks to the energy market. People will move to Alberta purely because they can afford to buy a single-family home in the city. And employers see that. 

What advice do you have for an investor looking to get into the Edmonton commercial real estate market? 

If you’re not from Edmonton, reach out to as many brokers or people with ties to the market as you can so you can get on their list of off-market properties. Make sure you’re connecting with as many people as you can so you know what’s available. You need to have a concise idea of what you’re looking for.

Last question: Edmonton Oilers or Calgary Flames?

I’ve been in Edmonton my whole life, except for when I was born in Calgary. I’m an Oilers fan usually but I’m happy for either team to go on. I’m an Alberta fan! 

Find out more: 

https://ca.linkedin.com/in/bronwyn-scrivens

https://bronwynscrivens.com/

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