‘Last mile’ cost reality should drive change in industrial real estate

Stubbornly high energy costs, which are expected to rise even further in the future, will have profound implications for industrial real estate, attendees were told last week at Queen’s Real Estate Roundtable and Executive Seminars.
“Fuel costs, intermodal (transportation) and deconsolidation are big things that are happening right now,” said David Ward, director of acquisitions, Morguard Investments Ltd., one of four executives discussing “Lifting industrial real estate values through acquisition, listing and managing.”
“In the future when energy costs increase significantly, I think there is going to be a re-evaluation,” he said. “It is going to be very difficult to service major centres or large populations in general having large-scale distribution facilities.
“I think there will be a move afoot to deconsolidation,” he added, noting the last mile in the logistics chain is the most expensive.
That deconsolidation trend is already taking shape in Milton, Ont., where Target is taking on new distribution space in addition to facilities that they already have, said the Morguard executive.
“The Home Depots, the Walmarts of the world, they are starting to recognize that deconsolidation is more relevant.”
He also noted inland ports and intermodal facilities will become more important in the logistics supply chain in a high-cost energy future.
“We are starting to see places like Dallas, Columbus, Ohio, Winnipeg, Edmonton and more recently Regina starting to start investment to catch those containers coming off the ships and being sent directly to the intermodal facilities at the inland port where they are put directly on a flatbed truck and to the distribution centre.”

505 Industrial Drive, Milton, ON owned by FAM REIT
Plenty more space coming
The GTA market, home to about half the industrial space in the country and North America’s fourth-largest industrial real estate market, has recently emerged from years of depressed rents and is now in the midst of a building boom, observed Ward.
“There is probably 5.3 million square feet of new development in the GTA right now, but I would say 3.5 (million) of that is spec,” he said. “It will be really interesting over the next little while how that spec product does.”
He added that there is 14 million sq. ft. of new development across Canada as a whole.
Industrial rents today in the GTA are edging up to the $6 to $6.50 per sq. ft. range that developers require to make new development financially feasible.
That’s a welcome change from just a few years ago when speculative new industrial development was renting for a little as $4 per sq. ft.
Fortunately, those desperation deals are disappearing because they were primarily short-term contracts.
The interest in space in the GTA, evidenced by improving rents and space absorption on a year-over-year basis, has been driven primarily by foreign demand, resulting in average per sq. ft. rents of $5.70.
“The demand that is occurring from U.S. retailers, U.S. consumer goods companies that are getting into the market, they look at Toronto as both a market of its own but also as a hub for all of Canada,” said Ward.
Power shift
Shant Poladian, a former Bay Street real estate analyst who now serves as chief executive officer of FAM Real Estate Investment Trust, predicted that the real estate cycle dominated by falling interest and cap rates is turning in favor of REITs such as his.
“We have had the benefit of substantial declines in the bottom end of the yield curve over the last two decades and I think we are at a point now where that is changing and the balance of power will go more into the hands of the buyer as opposed to the seller,” he said.
“We will adjust up to a more normal interest rate environment. This will come at the same time as many of the pension plans will be paying out more than they are taking in, and in that context from an asset allocation perspective, their policies will be geared more to selling real estate as opposed to buying it,” he added.
“So the opportunity to buy higher-quality real estate will probably come in droves five years from now at prices that make more sense.”
Poladian, who noted that Canadian REITs had a market capitalization of $7 billion a decade ago when he got into the business and is $50 billion today, said the 30-REIT universe of today will undergo similar change in the near future.
“You will see a lot more growth, you will see consolidation, not everyone is going to make it and that is very healthy.”
He expects future consolidation in the wake of the Primaris REIT acquisition to be driven by acquisitions of both pure play and multi-asset REITs.



Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

Read more




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