Industrial rental rates in Montreal will continue to rise but not at the explosive level seen in the last year.
That was one of the conclusions of a session on the city’s industrial market during the Montreal Real Estate Strategy and Leasing Conference Sept. 20 at the Palais des congrès convention centre.
“As long as vacancy rates stay at one or two per cent, rents will increase, but I think we’ll flatten the curve a little bit,” said Mathieu Bélanger, managing director, leasing and asset management services at Colliers. “Rents will continue to rise, but with more restraint.”
Montreal industrial rents will not increase 27 per cent year-over-year as they did this year, but will continue to go up slightly and then stabilize, said Robert Giglio, vice-president leasing at Broccolini.
“I think market rates will still grow at a slower pace, maybe five to 10 per cent every year,” said RoseFellow co-CEO Mike Jager, who added it will hit an average of $18 to $20 per square foot in four or five years.
Industrial vacancy to remain sub-two per cent
He predicted industrial vacancy rates in Montreal will remain at about two per cent for at least another four or five years, meaning that even if demand drops by 50 per cent, “we still can’t fulfill the need of the market.”
Jager noted there are 22 industrial buildings under construction in the Greater Montreal Area with about 5.5 million square feet, but 75 per cent of that space is already leased.
“The market is getting gobbled up,” said a bullish Jager, so RoseFellow plans to continue to buy land and build on spec for as long as it can.
Gabrielle Saine, commercial real estate broker at NAI Terramont Commercial, agreed rents will stabilize. She noted “there’s less frenzy than we saw last year” and some clients are delaying decisions, to wait and see what happens.
Aside from distribution centres, there has been an explosive increase in demand for temperature-controlled spaces for frozen foods in the wake of a trend toward healthier eating, Saine said.
Demand is also being seen for space for battery manufacturing and storage, Giglio said.
What’s not being seen this year are many calls for legal cannabis or digital currency clients, said Bélanger.
Relocations and rightsizing
For the first time in her career, Saine is seeing clients forced to relocate because they can’t come to terms on rental rates with their landlords.
Other clients who find rents of $18 per square foot difficult to swallow are signing short-term, three-year leases, she said. Saine is also seeing right-sizing, with tenants reducing their square footage.
Tenants are also optimizing their operations. For example, one client in the temperature-controlled field moved and kept the same footage but doubled the amount of pallet space.
Many clients who want to be on the Island of Montreal must enlarge their geographical region significantly and end up in places like Saint-Jérôme, Varennes and Saint-Jean-sur-Richelieu, she said.
Other clients are splitting up office and warehouse operations to control costs.
However, Giglio maintained businesses that are run efficiently should be able to absorb increased rental costs and reflect them on the prices of products and services that they sell. “I don’t think the landlords are putting people out of business.”
Traditionally the industrial market in Montreal was a game of musical chairs involving local tenants, Giglio said, explaining why rental rates remained stable for many years.
However, in recent years, business has been growing exponentially for local companies and “we also have an influx of national and international users that we never had before,” Giglio said.
Exit strategy concerns
Although rental rates will rise, it’s the exit strategy that concerns Giglio. “If you build it, they’ll lease it. It’s what you do with it once it’s leased – can you sell it? That’s the scary part. Sometimes we have to put the brakes on some of our projects that we’re thinking of putting in the ground.”
Giglio added increasing interest rates and uncertainty about cap rates makes it difficult to do an underwriting. While rental rates have gone up significantly, “the cost of capital is a challenge. We’re looking at either adjusting our return expectations or trying to get more money on the rental side,” he said.
“The challenge is always on the exit and not so much on, ‘You do your build and it will get rented.’ ”
Panelists were asked by an audience member whether Montreal will see multi-storey industrial construction.
Jager said current rental rates will not support that type of construction. An analysis by RoseFellow found rental rates would have to reach $24 or $25 net per square foot to make it viable.
But, “we’re on an island surrounded by agricultural land so there is no more space. It will happen,” Jager concluded.
Giglio, however, said Montreal’s climate with snow loads and the need for snow removal make multi-storey industrial difficult.
In addition, land costs are not sufficiently high to justify the build.
“When land costs hit $100 a square foot, it will start to make sense.”