A 165,000-square-foot logistics and warehousing facility slated for completion in 2024 is proof recent headwinds, namely rising interest rates and a recession that looks more imminent by the day, can do little to quell momentum in Southwestern Ontario’s white-hot industrial real estate sector.
The development in Guelph will be a partnership between private equity real estate developer and asset manager Forager Real Estate Partners and Sherway Group, a third-party logistics company that will be the facility’s sole tenant. The industrial-zoned parcel of land on which the facility will be built was an off-market transaction Forager's due diligence indicated would yield strong returns.
“Leasing fundamentals are still very, very strong with historically low vacancy rates and sustained upward pressure on rents, and it’s our feeling that it will be an enduring theme for some time,” Conor McBroom, president of Forager, told RENX.
“This opportunity was brought to us by our contacts in the brokerage community and we were compelled to take a closer look at it.
"Guelph is a high-growth municipality and strategically located, close to Highway 401 for proximity, and it has a good employment base.”
Guelph site zoned for industrial
A crucial element in Forager’s decision to acquire the property is that it was already zoned, shaving at least 18 months of rezoning off of the construction timeline and mitigating the uncertainty that can sometimes occur when dealing with planning departments.
Moreover, the Clare Road West site sits on a corner with high visibility in an existing industrial park.
As McBroom stated, a critical consideration for Forager was the site’s proximity to the 401 corridor.
It is of utmost importance to tenants like Sherway — which McBroom said provided input throughout the acquisition process – that freight goods back and forth across the province.
Land costs in Guelph aren’t as cumbersome as in locales such as Mississauga or Brampton, either.
According to Duncan Webster, vice-president of CBRE, Southwestern Ontario’s industrial sector is poised for more growth for several reasons, including, as McBroom stated, lower costs than the Greater Toronto Area.
The area comprising Guelph, Kitchener-Waterloo and Cambridge has a sub-one per cent vacancy rate and roughly 1.5 million square feet of supply slated for delivery next year, much of which is pre-leased.
Despite a rising interest rate environment and looming recession, however, Webster anticipates vacancy will remain exceptionally low.
Wide range of needs fuels industrial demand
“With the prevailing limited supply on the industrial side of things, you’re seeing a lack of new product coming to market under 250,000 square feet, so overall, whether it’s construction costs or the cost of land or development charges and other municipal levies, there’s a challenge,” he said.
“I think the top categories of employer are going to be auto and auto-related suppliers, automation groups, as well as e-commerce groups, so third-party logistics groups and direct e-comm groups as well.”
Demand for small- and mid-bay leasing will endure, recession or not, because space for companies is insufficient, he added.
There are also four post-secondary institutions in the area, University of Guelph, University of Waterloo, Wilfrid Laurier University, and Conestoga College in Kitchener, which churn out a sought-after workforce.
“It’s more of an economic driver for this area. The employers of today don’t just look at three buildings and choose the cheapest one; the employer of today looks at quality of labour, type of labour and cost of living for the average employee,” Webster said.
“This region is uniquely positioned within Southern Ontario to offer all of that and more.”
Sherway signs long-term lease
An additional salient detail about the facility is its leasing terms. Forager’s tenant is a subsidiary of Sherway Group — a company with which Forager has an existing relationship despite this being their first partnership — and has signed a long-term lease.
This is counter to a recent trend of short-term pacts landlords have insisted upon to capitalize on scorching demand for industrial space.
“The performance standards of the building are that it’s best in class, has 36-foot clear height, full shipping and receiving, it’s capable of storing refrigerated food grade,” McBroom said.
“At the same time, we’ve structured a lease that is intended to create the real returns.
"We have a mechanism in the lease that will determine what the ultimate rent is going to be on completion, based upon myriad factors like where cap rates are, what the construction budget ended up being and what an appropriate development spread is on the project itself.
"Like any institutional lease, we’ve got steps for annual CPI increases and rent steps.”
The surging overnight lending rate has led to declining consumer spending and hastened recessionary conditions.
It was only a couple of months ago that Amazon scuttled plans to expand warehousing capabilities in the United States and instead reduce its footprint.
However, McBroom noted e-commerce is driving a considerable portion of retail sales in Canada and he sees nary a sign of that trend moderating.
“You look at sales in this country and they’re being conducted online,” he said, “and there’s still substantial runway for e-commerce and sales growth for Canadian retailers, and part and parcel with that is sustained demand for warehousing and logistics space — logistics especially when you consider products and merchandise being returned.”