Masha Dudelzak, CBRE Ltd.’s research manager for the GTA, has identified a discernible trend among office tenants in Toronto’s industrial areas: they are increasingly abandoning “co-located” spaces in mixed-use properties with manufacturing, warehouse and office.
Reasons for the change have varied among the office and industrial occupants over the past five years – some sold or moved, others wanted a better-located office and some companies have engaged a third-party logistics provider – but the shift is clear and growing.
“I think it is picking up steam, we are hearing a lot more about it recently,” said Dudelzak, who began her research on the decoupling trend this year after learning about it anecdotally from brokers in her firm.
The CBRE researcher has identified approximately 30 cases of large industrial tenants in the GTA moving away from the traditional model in favour of a real estate plan that splits office off from production facilities.
This decoupling trend, where occupants are moving out of space say 15 or 20 years old, well-located and functional, is occurring among a range of industries, but most frequently in the food and beverage and pharmaceutical sectors.
You can roughly divide the shift into three scenarios:
* Cinram International maintained its Canadian offices while moving production abroad to cut labour and production costs;
* BASF Corp. is among those maintaining their industrial premises while centralizing office operations in traditional office buildings away from production facilities to better attract labour;
* McGraw-Hill Ryerson is outsourcing its warehousing operations to third-party logistics firms in order to “capitalize on specialization opportunities and create economies of scale.”
An industrial shuffle
Dudelzak said the decoupling trend is overall a positive for GTA real estate.
“Companies that are moving out of these locations, if they are not going to a third-party logistics provider, the U.S. or offshore, they are still moving into a different industrial facility.
“Net, there has probably been a gain in industrial because tenants still need industrial space. It is just not going to be in the same space as their office.”
Good for office, too
The CBRE researcher views the shift as a net gain for the office sector too, as companies transition white-collar employees to better-located, more functional office-only real estate.
“It is adding absorption to the office sector,” she observed.
One of the best examples of this trend might be Coca-Cola Canada’s decision to move its office staff from a suburban bottling location to a newly constructed three-storey addition to the Toronto Sun building in the city’s downtown.
Coke’s decision to leave the “Mad Men era” suburban office for a transit-friendly modern space will surely make it easier to attract, hire and retain next-generation workers.
It also illustrates the shift away from a highways-first mentality of the industrial sector to the “transit-first” mindset typical of the new office culture.
“The drivers behind making industrial decisions and office decisions are very different,” she said. “For industrial, you want to be around highways and you want (a certain) configuration depending on what business you are in.
“For office, people come first and for industrial, people might come second.”
CBRE sees challenges ahead for landlords attempting to reposition industrial properties with a high percentage of office.
They may try to separately lease the office and industrial components within a single industrial building, but it is an option “fraught with locational and structural challenges, including limited parking for office users.”
Landlords might opt to retrofit their properties to pure industrial facilities, by removing or reducing the office component.
Not all of that office space demand is making its way to Toronto’s downtown core.
CBRE sees industrial businesses gravitating towards traditional office space in the Markham North, Richmond Hill and Meadowvale submarkets which offer “large, modern buildings, with sizable floor plates, ample parking, superior highway access, and numerous amenities.”