Mixed signals for Canadian industrial real estate

Long the red-headed stepchild of the commercial real estate business, the industrial sector produced some compelling – and conflicting – statistics and predictions – for attendees of the Toronto Real Estate Forum last week.

It’s becoming known that Toronto stands as a major industrial hub, ranking as the third largest industrial market on the continent with 824 million square feet of space. (Montreal and Vancouver rank 12th and 13th respectively in North America).

What is most interesting for industry players, however, is just how well-utilized all that space is. Of the top five North American industrial markets when it comes to boasting the lowest vacancy rates, four of them are in Canada.

That is no accident, noted Mark Stainer, Cushman & Wakefield’s National Industrial Director and Senior Managing Director for Toronto West. “The reason for that is we have controlled growth. We have developers and asset managers who don’t overbuild. The U.S. is a lot more mobile and they build a little too randomly.”

Stainer, who moderated a panel on the outlook for industrial real estate in 2013, said that even with those continent-beating vacancy rates (currently at about six per cent) Canada has the lowest amount of new supply coming on stream than it has in the past 25 years. “Supply and demand is being controlled in response to market conditions.”

Cushman & Wakefield stats show that demand simply has not returned to post-2008 levels, making for a glacial post-recession rebound compared with earlier downturns and recoveries. By illustration, absorption in Toronto after the tech boom bust of 2000-2001 was 3.5 million sq. ft. per quarter and about 2.2 million sq. ft. in 2004. Today we are creeping ahead with quarterly absorption rates of about 100,000 sq. ft. per quarter.

Cushman estimates industrial rents range from a low of $4.82 a sq. ft. for Toronto to $5.00 for Montreal, $7.58 for Vancouver, $8.20 for Calgary and $8.37 for Edmonton.

Panelists an Optimistic Group

Asked where the greatest potential lies for industrial real estate, Dundee Industrial REIT’s President and CEO Scott Hayes (DIR.UN-T), perhaps not surprisingly, pointed west.

“Clearly we like the markets in Western Canada where there is actually a real demand for space, we are seeing rental rates go up, we can’t say the same of Ontario right now, so we have a real bias towards Western Canada and we are a very significant owner in Regina.”

The Dundee president noted that “we are seeing ample supply of product, there is no shortage of product to buy.” Investor interest in the long-neglected industrial sector is also picking up. “There are more and different people bidding on the A-minus and B stuff. We are seeing a lot more people that are turning their attention to the asset class.”

Many of those buyers have deep pockets. “What we are finding is more pension funds and their advisors bidding on this stuff, whereas before it was sort of the usual suspects, you would anticipate bumping into all private and the three public guys. I think there has been a re-allocation towards real estate inside the Canadian institutions and as a result they are showing up to buy some stuff.”

Later in the day, Dundee Industrial announced the acquisition of a 5.3 million sq. ft. portfolio of industrial properties from KingSett Capital for $498.5 million, cementing its position as the country’s biggest industrial REIT. More than one-third (36%) of the portfolio is in Atlantic Canada, with the rest in Quebec (20%), Ontario (14%) and Alberta (30%).

Spec Development Happening

John Hayes, Managing Partner of Blackwood Partners Inc., similarly noted the East-West dichotomy is stark in the industrial sector. In Edmonton, where Blackwood owns about three million sq. ft. of space, vacancy is rare despite the very uneven quality of buildings, a testament to the city’s current strength as a goods and services supplier to the oil industry.

“It is busy space that you would certainly be shocked at in Toronto and you would pass over it because it is B and C space and it is full and it is commanding high single and low double-digit rates.

“In Toronto we are doing spec development here because we think there needs to be additional supply of functional product,” Hayes added. “The vacancy rates of 6% we see are a total for all space which is kind of meaningless.”

The vacancy rate for functional logistics space is closer to 2%, Hayes company estimates. “So we think that the Toronto market, which is a 824 million sq. ft. market, is probably functionally a 300 million sq. ft. market. Adding 1% in 2012 as new supply is not a huge risk, so we will do that.”

Still, Blackwood has to sweat the details to make spec projects work in the country’s biggest metropolis. “In this marketplace, it is just barely affordable as a developer whereas you can build in the west and do about 100 to 200 basis points better,” said Hayes.

Vancouver’s Concert Properties Looks East

Lack of supply in the west has Vancouver’s Concert Properties Ltd. hungrily eyeing the potential of the GTA, Andrew Tong, the company’s Senior Vice-President of Investments, told attendees of the industrial panel discussion. “The ability to expand is limited,” he said of Concert’s home market of Vancouver.

“For Toronto, we say 'choose your adventure'. We can go multi-bay, we can go large bay, medium bay. We don’t distinguish them yet in terms of which one we like better, we just want to find the product and build a solid base here. For us we see Toronto as a permanent location for where we need to expand our business and our platform.”

For Concert, demand is strong in Edmonton and Calgary and the ability to move tenants to bigger locations is very limited because of the absolute shortage of industrial space. The vast Toronto market presents different challenges and in the company’s analysis, greater upside.

“You asked where is the greatest opportunity for rental growth,” said Tong. “It is probably Toronto, but you have to have the guts to hold on for a little while and be patient.”

Cushman’s Stainer, who noted that there is 3 million sq. ft. of speculative construction coming on stream for the Toronto market in 2013 and 2014, asked just where that demand is going to come from? Blackwood’s John Hayes, whose firm is building a 700,000 sq. ft. facility in the GTA on spec, sees one big tenant for the space coming from south of the border.

“We are hoping to get one single tenant, there is ample trailer storage, it is a great location with 32-foot clearing height.”

Subsidiaries of U.S. companies have been busily sniffing in the GTA and issuing RFPs for space only to be shot down by their head offices, still gun-shy given the slowly recovering economy. “My belief is that sometime in 2013 that is going to change,” said the Blackwood executive. “The U.S. economy is going to get more alive and some of these suppressed positions will go through.”

Dundee REIT’s Hayes similarly sees a potentially tight Toronto market in the GTA, despite planned new development.

“You are three or four lease deals away from having no big bay space available,” he said. “We saw that happen in Bolton (Ont.) in 2010-2011, everyone was looking around saying 'Oh we have all this over supply,’ and then three deals later it was a landlord’s market again.”

Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

Read more

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