By Mark Hannah
How do industrial property users cope with the inflated rents and lack of options? To answer this, we examine the current state of the industrial market, the key factors impacting it, and the new strategies for navigating this environment.
Canada’s users of industrial real estate are stressed and have reason for concern due to the limited opportunities caused by soaring land prices in all major markets. The national industrial vacancy rate is 2.9% according to CBRE’s 3rd quarter report. Toronto and Vancouver lead all major markets in Canada with record-low vacancy rates of 0.7% and 1.4% respectively.
New construction is creating supply but at significantly higher rental rates in order to offset high land prices and the increased cost of labour and materials. This has in turn had a trickle down effect to existing inventory. While there is a general shortage of all industrial space, the small (2,500 – 7,000 sf) and mid (7,500 – 20,000 sf) bay users are particularly impacted as opportunities are scarce. Properties that have excess land/yard area are being marketed for sale at inflated prices based on a “higher and better use” making it uneconomical for the traditional owner and/or user. This has priced many of the small to mid-bay users out of the market forcing them away from urban locations and into outlying markets.
In the 1900s and 2000s, rental rates were flat with plenty of options to choose from in Toronto and Vancouver. This allowed users to reasonably afford “market rent” without negatively impacting their business. Over the past 8-10 years, the push to re-zone industrial properties to higher density, coupled with the gentrification of industrial nodes bordering urban locations, has forced users out notwithstanding the desire by many municipalities to preserve their industrial base. As a result, rental rates have more than doubled.
For example, Toronto rental rates historically trended in the $5.00-$6.00 per square foot (psf) net range for 20 years and have recently escalated to the $8.00 – $12.00 psf net range (depending on the unit size). In Vancouver, rental rates were stagnant in the $6.00 – $7.00 psf net range for the similar time frame and have also experienced similar rent inflation in the $8.00 – $13.00 psf net range (depending on the unit size).
The economy appears to be strong with several industrial user groups such as e-commerce, food production, film production & distribution, cold storage, cannabis and last mile delivery of products contributing to this strong demand. However, the pent up demand is causing a major problem for tenants as availability is challenged and economic rents rose by 12% last year alone, according to JLL’s recent Q3 2019 Industrial Report. There appears to be no relief in sight as the primary culprit is soaring land prices.
Issues and Potential Solutions
Meeting the demand of industrial users in Toronto and Vancouver is the primary issue we face. According to Avison Young’s Q3 2019 Industrial Report, 3.0 million sf of new inventory will be completed in Vancouver this year and Toronto will add another 9.5 million square feet. While this new supply is good news, it is not enough to meet the demand.
Government at all levels (Federal, Provincial and Municipal) cannot be expected to control land prices but they can contribute in other areas. Municipal governments can help to improve the inefficient approval process for developers. Land prices are already very high and the lengthy time for approvals adds to the overall project cost for developers. Fast tracking approvals will ensure there is ample supply to meet the demand.
Another area that is a significant barrier to developing new product is the very high development cost levies (DCL’s). These costs could be lowered to offset the upfront cost of a new project. For example, in Mississauga Ontario, the DCL’s are as high as $25.00 psf whereas in Richmond BC, they are as high as $12.00 psf. This is a significant burden and disincentive for developers.
The Provincial government could eliminate the Property Purchase Tax (PPT) on land acquisition for development. The Provincial Government could also offer attractive low interest rate construction financing as it does with multi-family rental apartment buildings, to help encourage developers to build new product.
At the Federal level, GST is a deterrent to developing new industrial product as this cost is passed along to the tenant and reflected in the rental rate. The Federal government can have a big impact encouraging new supply of industrial product by eliminating the GST on new buildings. In many areas of the United States, the Federal Government has established “Opportunity Zones” and “Property Tax Holidays” to help encourage new development.
As a result of these conditions, there has been a movement by developers to build multi-level industrial for both small bay and large bay distribution users to meet the demand for both a strata/condo and lease opportunities.
Our Strategic Plays
Nicola Wealth Real Estate (NWRE) follows trends carefully to identify when future opportunities may exist.
The shortage of industrial space, specifically in the Toronto and Vancouver markets, is an obvious concern and an area for opportunity. Other than rental apartment buildings, the industrial asset class is, in our view, one of the safest asset classes for commercial space, as businesses need urban locations to lease and/or own.
As a result, Nicola Wealth Real Estate has identified a need in the marketplace for both “lease” and “strata/condo” ownership from users.
Here is what Nicola Wealth Real Estate has done over the past few years to help satisfy the demand:
IntraUrban Laurel – 8811 Laurel Street, Vancouver, BC
In 2015, NWRE acquired a 4.5 acre site in South Vancouver and designed a three-building, 155,270 sf small bay industrial strata project. The project was branded as our first “IntraUrban” project and appealed to the small bay industrial user who could acquire units as small as 2,500 sf but also combine multiple units to acquire larger premises.The units feature a ground floor showroom in the front, mezzanine office upstairs and a large warehouse area in the back with 24 foot ceiling heights. The project pre-sold 100% prior to construction proving that the demand was strong from small bay users seeking quality industrial product. The project is in partnership with PC Urban Group.
IntraUrban Brentwood – 5495 Regent Street, Burnaby, BC
In 2016, NWRE acquired a 4.04 acre site in Burnaby, BC and designed a three-building, 99,463 sf small bay industrial strata project. The project is branded “IntraUrban Brentwood” and appeals to the small bay industrial user who can acquire units as small as 2,700 sf or combine multiple units to acquire larger premises. The units feature ground floor showroom in the front, mezzanine office upstairs and a large warehouse area in the back with 24 foot ceiling heights. The project is 100% pre-sold and expected for completion by Q4 2020. The project is in partnership with PC Urban Group.
IntraUrban Evolution – 1055 Vernon Drive, Vancouver, BC
In 2016, NWRE acquired a 0.80 acre site and designed a four (4) storey, mixed-sue industrial/office building in the False Creek area of Vancouver. The project was branded “IntraUrban Evolution”. The property configuration represents light industrial use on the first, second and third floors with 18 foot clear height and office use on the fourth floor with 12 foot clear height. Construction for the site started in Q3 2019 and is expected to complete in Q4 2020. The project is in partnership with PC Urban Group.
IntraUrban Rivershore – 11111 Twigg Place, Richmond, BC
In 2017, NWRE acquired an 11.8 acre site on Mitchell Island and designed a single industrial building with a total area of 258,811 sf. The project named “IntraUrban Rivershore” appeals to the small bay industrial user who could acquire units as small as 3,640 sf or combine multiple units to acquire larger premises. The project is 100% sold and turned over to the purchasers as of Q2 2019. The project is in partnership with PC Urban Group.
IntraUrban Enterprise – 1625 Dilworth Drive, Kelowna, BC
In 2017, NWRE acquired a large land parcel at the prime intersection of Dilworth and Enterprise in Kelowna, BC. The assembly was subdivided into two phases, with Phase 1 for a new Ford dealership and Phase 2 being a development of two industrial strata buildings with a total area of 72,624 sf. This project branded “IntraUrban Enterprise” targets the small bay industrial users. The project is currently under construction and scheduled for completion in Spring 2020. The project is in partnership with PC Urban Group.
West Kelowna Industrial Park – 2648 Kyle Road, West Kelowna, BC
In 2018, NWRE acquired a 10.33 acre site in an established industrial neighbourhood in West Kelowna, BC, with a near zero percent industrial vacancy. The strategy is to subdivide the
lot into two legal parcels of 2.00 and 8.33 acres, respectively. The smaller lot will be sold and the remaining 8.33 acres will be developed into four small bay strata industrial buildings with a total area of 179,324 sf and units sizes ranging from 1,400 sf to 6,500 sf. Purchasers will have the ability to combine multiple units. The project is currently 55% pre-sold with construction expected to complete by Q4 2020.
South Shore Business Centre – 11611 No. 5 Road, Richmond, BC
In 2018, NWRE acquired a 1.88 acre site on No. 5 Road in the heart of Riverside Industrial Park in South Richmond, BC. The site was shovel ready with permits in place to construct a
42,423 sf multi-unit strata industrial building, with units ranging in size between 6,427 and 7,330 sf. With a record low industrial inventory in Richmond, 7 out of 8 units were sold within
60 days of launching the sale campaign. As of Q1 2019, the project was 100% pre-sold and the project completed in the Summer of 2019. The project is in partnership with South Street
880 Avonhead Road – Mississauga, ON
In 2019, NWRE acquired a 13.39 acre industrial site in Mississauga, Ontario. The property was acquired through a “build to own” strategy to construct a modern 270,473 sf distribution centre featuring 36-foot ceilings, flexible for either multi-tenant or single tenant occupancy. This opportunity enables NWRE to develop a quality industrial asset in a strong industrial node with a low industrial vacancy rate of 2.3%. Construction will commence in Q1 2020 with completion expected for late 2020. The project will be 100% owned by NWRE upon completion. The project is in partnership with First Gulf.
Bronte Road – Oakville, ON
In 2019, this 13.39 acre site located on Bronte Road in the town of Oakville was put under contract and closing is expected in Q1 2020. The proposed development will be comprised of 4 small-bay industrial strata buildings with a total saleable area of 220,000 sf, sub-dividable into 2,800 sf units. The construction is expected to break ground by Q2 2021, with completion expected for Q1 2022. This deal represents NWRE’s first small bay industrial strata project in the Greater Toronto Market. This project is in partnership with First Gulf.
This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.