Proximity to the burgeoning Greater Toronto Area (GTA) has led to an “explosion” of development land prices, with increases of 500 per cent – or more – in prime areas of Southwestern Ontario over the past few years.
The sector most affected is industrial and employment lands in areas such as Hamilton and the Guelph-Kitchener-Waterloo-Cambridge regions which neighbour the GTA.
“As a participant in the local market for 30 years, it is just absolutely shocking to see this,” CBRE vice president and sales rep Joe Benninger said, speaking during a land panel discussion at the recent Southwestern Ontario Real Estate Forum in Kitchener.
“Industrial lands have been worth $250,000 to $350,000 an acre for almost 30 years I have been in the business and over the last few years it has just exploded to what is now averaging almost a million-and-a-half in Waterloo Region and of course, to a lesser degree but still fairly substantial increase down in London as well.”
The quantity of land being transacted has escalated along with the prices.
“Historically our market is 500 to 800 acres a year. We’ve seen an explosion in transaction volume on the employment land side,” he observed. "It really started in 2021. Despite the fact the past 12 months has been pretty tough, and I think we’ve seen a softening of transaction activity, there actually still is quite a bit of activity in 2023.”
The region saw over 2,100 acres of industrial, commercial and investment land transact during 2022, and through the end of April this year that figure is over 1,000 acres.
Change in perspective about SW Ontario
One of the most recent examples is an unserviced 7.9-acre plot just outside Cambridge which sold for $16.35 million. Sold to a trucking firm which will be an owner-operator, it sits along the Hwy. 401 corridor on Cedar Creek Rd.
"I’m not aware of any special motivations other than they really wanted it and it’s suited their needs well," Benninger told RENX in a follow-up discussion.
The transaction is indicative of a change in perspective about the region.
“I would suggest it’s a monetary consideration and the value of land they are getting here versus in the GTA,” Kristen Barisdale, vice-president of planning at GSP Group, said during the forum. She noted some of the factors specific to the Kitchener-Waterloo corridor.
“I think we are in a really ideal location community. We’ve got the proximity to (Highway) 401, most of the investment we are seeing in employment is along that stretch with easy access, and we’ve got the population growth to go along with it.”
Factors would be similar in the Hamilton region, which has access to both the regional QEW and 403 highways, and the U.S. border.
Cooper Construction's industrial development "risk"
For companies which have been developing in the Southwestern Ontario region for many years, the sudden attention is a dramatic change.
Domenic Natale, vice-president of development and real estate for Oakville's Cooper Construction, looked back 20 years to the beginnings of a 600,000-square-foot industrial development property in Guelph.
“At that time anything west of Milton was, 'where is Guelph?' That was a risk we took, to take on the development and say, there is opportunity here,” he explained. “A lot of that market was internal. We weren’t looking at, ‘how do we get GTA companies to come out to that market’. It was more an internal market, internal growth.”
Fast forward to 2018 and 2019, when soaring prices and scarcity of land in the GTA, combined with the first inklings of a warehousing and industrial revival, forced companies to look just beyond its borders.
“When the values in the GTA started getting higher, people started to look west of Milton and say, maybe there’s opportunity," he said. "We started to see a little bit of shift in the last five or six years where we saw the jump from Milton over to Guelph. That was where (GTA) rents where higher, availability was low, (firms) couldn’t find something quick enough to get into the market.
“We started to see the shift and we were able to do larger leasing, 250,000 square feet, which at that time again was kind of unheard of in the southwestern market.”
Cooper was involved as a partner in Guelph’s Hanlon Creek Business Park, where last year it stabilized two large assets (totalling just over 440,000 square feet) and sold its remaining 50 per cent interest to its partner, Summit Industrial Income REIT, for about $55 million.
Slate to redevelop Hamilton's former Stelco lands
In the Hamilton area, the highest profile acquisition is Slate Asset Management’s purchase of the former Stelco lands, putting an 800-acre waterfront industrial redevelopment into play. Slate paid $514 million for the brownfield site, with plans to develop up to 12 million square feet of manufacturing and employment space.
“We saw an opportunity there,” Slate's senior vice-president, development Steven Dejonckheere said. “The Stelco site was behind closed doors for so long, and people assumed you could never unlock it."
“There is momentum on the employment side, there is changing infrastructure, there’s momentum on the residential side,” Dejonckheere said of Hamilton. ”We think it is finally hitting that tipping point where you are seeing the number of cranes in the sky, the number of projects. The value that we see is not necessarily just the margins on our projects today, it’s the long-term story on that.”
While industrial is affected by similar headwinds to those in other development sectors, the fundamentals remain strong.
“Rents is what drives most of the decisions,” Natale said, and leasing rate growth means developers can overcome other hurdles. “Capital is a little bit harder to get, interest rates are higher, people putting money into deals right now is a little bit less than it was before, so I think there’s definitely challenges ahead.”
But demand for space remains strong and the population continues to grow, underpinning an optimistic forecast.
“The numbers still work at the rents we are seeing," Natale concluded, "and we’re not hearing that the rents are going to go down. So right now, we are still okay.”