The vacancy rate for industrial space in Laval has fallen to nearly zero, leaving space-seeking tenants feeling a near “sense of panic and desperation,” said James Cacchione, vice-president of CBRE in Montreal.
Successful companies are trying to grow “but there’s no space, so they’re freaking out,” he said. When told there’s no space, he added, potential companies have a difficult time comprehending the situation.
Cacchione was speaking at CBRE’s 2019 Laval Market Outlook Breakfast on Sept. 26, held at the 1909 Taverne Moderne in Place Bell in Laval.
He categorized the current mood of the market as a rat race, “because we’re all running around fighting over the few scraps left and the first one to the space is the winner. It’s all about finding the space. Everything else is secondary.”
Laval’s 750 industrial buildings
With only a river separating it from Montreal, Laval is Quebec’s third-largest city, with a population of 430,000. Its 750 industrial buildings total 32 million square feet, representing 11 per cent of the entire Greater Montreal industrial market.
Cacchione noted the official Q3 2019 industrial vacancy rate for Laval is three per cent (compared to 2.8 per cent for Greater Montreal), but he explained there is lot of padding in that number.
To arrive at the real industrial vacancy rate, he suggested removing all space smaller than 10,000 square feet. “That’s a separate market in and of itself,” he said. “It’s typically very easy to find space in that size range.”
Then, he said, remove all space which is officially still available, but is under contract or under offer. Next, remove specialized products, including industrial space that has had its zoning changed from industrial to residential.
The rest of the space in that category includes a meat-processing facility and buildings with few or no loading docks.
Next, Cacchione said, a large building that hit the market at the end of summer – 5555 Ernest Cormier – should be removed from the list of available spaces. It’s Laval’s seventh-largest industrial building with 267,800 square feet.
“The tenant pool for a building like this is not very big,” he explained. “Most of our Laval-based clients are looking for between 20,000 and 150,000 square feet.”
Mid-sized vacancies: “Nothing there”
Once all that is done, the Q3 industrial vacancy rate in Laval is 0.34 per cent, or 105,827 square feet, which is “incredible,” he said.
That space is split among eight buildings with between 10,000 and 19,000 square feet of space available.
“If you’re a company in Laval and you’re looking for just over 20,000 square feet to almost 200,000 square feet, our search would be very quick. There’s nothing there.”
The tight market has left the brokerage in a challenging spot: “You really have to be creative, think outside of the box. We’re really trying almost to push and provoke transactions to happen to fulfill our clients’ needs.”
He said while the industrial vacancy rate during the past 10 years peaked at 11.5 per cent for Laval (compared to 10.5 per cent for Greater Montreal), it started to tighten around 2017.
Rents, purchase prices on rise
Asking net rental rates, which remained stable until 2017 at between $5.25 and $5.75 net per square foot, are on the rise, Cacchione adds.
The average asking net rental rate in Laval for industrial space is now $7.11 per square foot, 15 per cent higher than the same period last year. The Greater Montreal average is $6.21 per square foot, 10 per cent higher than last year.
However, he notes achieved net rental rates – which represent a better barometer for what’s happening – average $6.58 per square foot net for major lease transactions during the past 12 months.
Purchases are seeing similar price pressures. Industrial buildings could be purchased 10 years ago for about $58 per square foot in Laval and $57 per square foot in Montreal.
Average asking sales prices are now $101 per square foot in Laval and $99 per square foot in Greater Montreal.
Achieved sales prices for major transactions in the last 12 months have reached an average of $123 per square foot in Laval.
Given the tight industrial market, new construction “comes up in our meetings all the time now,” Cacchione said. “People are wanting to know, ‘Where are the land opportunities, are there any, how much is it?’ ”
Potential new construction
He said there are three major sectors on the island of Laval which offer the most in terms of undeveloped industrial-zoned land.
The first is around the intersection of Highways 13 and 440: “We really do believe this is going to be a hotbed of development going forward over the next 24 months.”
The others are near Highway 19 and De Lierre Street and at the intersection of Highway 25 and Montée Masson.
“Spec construction is something we expect and hope to see moving forward in 2020,” said Geoffrey Hughes, vice-president, advisory and transaction at CBRE in Montreal.
In addition, sale-leaseback transactions are on the rise, as is the renovation and expansion of existing buildings.
In an attempt to predict what the future has in store for industrial space in Laval and Montreal, CBRE looked at the Toronto and Vancouver markets.
“As soon as they hit below 3.5 per cent vacancy, the following 24 months saw incredible booms in sale price increases and rent rate increases,” Hughes said.
As the Laval and Montreal markets are now below 3.5 per cent, “by the end of next year, it’s possible we could be seeing $8.65 asking net rents and $155 asking sales prices,” he said.