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Canadian industrial land prices rise as supply dwindles

While industrial land continues to be developed at an increasing pace in Canada, the amount avail...

GRAPHIC: JLL graphic illustrating total Canadian industrial land sales. (Courtesy JLL)

JLL graphic illustrating total Canadian industrial land sales. (Courtesy JLL)

While industrial land continues to be developed at an increasing pace in Canada, the amount available is dwindling, especially around Toronto and Vancouver where there are defined boundaries limiting expansion.

“This means that if vacant industrial land continues to be absorbed in the markets because developers are building more space to meet demand, then industrial land prices should continue to go up,” said Thomas Forr, research manager for JLL Canada, which just released a report on industrial land in five major Canadian markets.

“Even though there is a ton of construction happening in Metro Vancouver and the Greater Toronto Area (GTA), supply still hasn’t caught up to demand.”

Both Metro Vancouver and the GTA have industrial vacancy rates below three per cent and the two markets combined to contribute 74.1 per cent of the total transaction volume for industrial land last year.

“Before the downturn in the price of oil, the Alberta industrial markets were a large contributor to the overall amount of land transactions,” said Forr. “After the downturn, however, transactions in Edmonton and Calgary’s industrial markets slowed down dramatically.

“Because of this, even though there has been increased demand in markets such as Metro Vancouver and the GTA, overall industrial land transactions have been lower, although they are trending upward now.”

The Canadian industrial market averaged 3.8 million square feet of deliveries, 2.9 million square feet of positive net absorption and 14.4 million square feet of space under construction per quarter from 2014 to the first quarter of this year. The average price per acre of industrial land increased by 58.7 per cent to $952,240 in that time, while the industrial vacancy rate early this year was the lowest in more than a decade.

Metro Vancouver industrial land

The supply of vacant industrial land decreased by 24.5 per cent in Metro Vancouver from 2005 to 2015 and — with constraints caused by the ocean, mountains and the American border — it’s forecast that vacant industrial land could be completely absorbed by the early 2030s.

There was an average increase of 43 per cent more space under construction each year from 2014 to 2017 and the average price per acre of industrial land rose 81 per cent to $1.12 million. The price per acre rose to $1.6 million at the beginning of this year.

Since prices for industrial properties have been rising so quickly, some owners have been flipping them to take advantage. In Surrey, 4.33 acres at 19283 28th Ave. sold for $894,300 per acre in the fourth quarter of 2016. A year later, that same property sold for $1.41 million. There were 23 similar resales in Metro Vancouver from 2014 to 2017.

There were 23 transactions in Abbotsford in 2017, which tripled the average of the three previous years. Tenants are moving to submarkets they hadn’t previously considered, because they need more space and developers are buying land and building there. Hungerford Properties plans to build 12 buildings, with multiple options for users requiring 100,000 square feet of space, at the intersection of Trans-Canada Highway and Mount Lehman Road.

With vacant industrial land becoming harder to find, developers are becoming more creative. PC Urban and an investment partner purchased a 0.8-acre site at 1055 Vernon Dr. in early 2017 that had a 55,000-square foot building on it. It was demolished and a 105,000-square-foot, three-storey industrial building replaced it.

“There is now an institutional investor that is taking a serious look at building a multi-storey warehouse at one of their industrial parks,” said JLL senior analyst Ben Wedge of what could become a trend in Metro Vancouver.

Greater Toronto Area industrial land

The value and volume of industrial land sales in the GTA doubled from 2014 to 2017, and demand is pushing prices to record highs. The region is bounded by Lake Ontario to the south and the Greenbelt to the north, which is forcing people to look west and east for vacant industrial land.

Approximately 1,270 acres of industrial land was absorbed from 2014 to 2017, 75 per cent of it in GTA West.

GTA East is now gaining more traction with developers because it has the lowest price per acre for vacant industrial land of all the submarkets in the GTA. The sector is starting to experience increased tenant demand because of cheaper lease rates.

Municipalities across the GTA have been very slow to approve site plans and rezoning of land. They’ve also continued to add development charges for new projects. As a result, they’re slowing the development pipeline in the face of strong tenant demand and contributing to rental rate growth.

Rising labour and material costs are also being reflected in higher lease rates once a building is constructed.

The GTA is the third largest industrial market in North America with 780.38 million square feet of space. It has more absorption than any region in Canada, so Wedge said developers can justify building larger amounts of speculative space.

A lack of vacant land has prompted the redevelopment of existing properties to provide efficient and functional space based on what today’s tenants need. OPTrust purchased a 15.25-acre site at 307 Orenda Rd. in Brampton, which had 240,000 square feet of existing space. It was redeveloped with a new 341,130-square foot building that’s been leased for six years to Sumitomo Electric.

Greater Montreal industrial land

Vacancy rates have been dropping and average asking net rent for industrial space exceeded six dollars per square foot for the first time a year ago. Construction is also ahead of where it was in the past, as the economy has performed well and GDP growth over the past two years has exceeded the 10-year average.

The Port of Montreal will open an additional terminal in Contrecoeur to accommodate this economic growth. This will likely attract users in the transport and logistics industries.

Increasing demand is also fuelling speculative construction. Bentall Kennedy, for example, is completing a 216,000-square-foot spec development in Saint-Laurent.

Much of Greater Montreal’s industrial inventory is aging and has clear heights of 20 feet or below, while users now want from 24 to 36 feet. This could lead to increased redevelopment of already occupied sites.

Greater Montreal experienced a 69-per-cent increase in industrial land prices from 2016 to the first quarter of 2018, which was exceeded only by Metro Vancouver. That upward trend is expected to continue, according to the JLL report.

Unlike hemmed-in Greater Vancouver, the Greater Montreal market has room to grow up both the North Shore and South Shore.

Calgary and area industrial land

Calgary’s industrial market has less reliance on the oil and gas industry than Edmonton, as it’s more of a logistics hub for Western Canada. So while it experienced higher vacancy rates and a lull in construction and land transactions due to the crash in the price of oil, it’s regaining momentum and land prices are expected to increase.

Land in outlying markets, such as Balzac, continues to be priced at $550,000 to $650,000 per acre, while inner-city land sells for around $1 million per acre. Southeast industrial land, depending on parcel size, is priced between $650,000 and $750,000 per acre.

With more than 1,100 acres of land available for sale in Balzac, Walmart, Smucker’s, Gordon Food Service and Amazon established large-scale distribution centres there.

As Rocky View County provides easy access to intermodal hubs and regional highways, it’s also becoming popular for the sale of industrial land. Although it doesn’t have immediate access to the inner-city, businesses are gravitating there for the availability, general savings in lot pricing, reductions in business and payroll tax, and lower rental rates due to lower land costs.

“Developers can just continue to move farther away from Calgary and Edmonton’s city cores to find land to build on,” said Forr.

Greater Edmonton Area industrial land

Demand for industrial land remains relatively low, but the legalization of cannabis is providing an avenue for improvement. The area surrounding the Greater Edmonton Area already contains more than a million square feet of properties specific to the industry, and this trend is expected to continue as the industry grows.

“Industrial land is too expensive in the GTA and Metro Vancouver, so growers aren’t looking to these markets to purchase land and then grow on it,” said Forr.

Smaller-scale general industrial buildings have been driving sales within the city, most notably in the southeast and northwest submarkets. Approximately 90 per cent of the city’s industrial land absorption over the past decade has been related to light and medium industrial development.

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