Rising Dollar, High Operating Costs, International Competition To Impact Industrial Sector

Addressing the 2005 National Industrial Conference in Toronto hosted by Royal LePage – royallepage.com, James Ziegel, Vice President and National Director of Investment summed up his attitude toward the sector in two words, ‘rational exuberance’.  With the national industrial sector experiencing 13.6% returns from 2003 to 2005 there would appear to be a good ‘rational’ for being ‘exuberant.

Shelia Botting, Executive Vice President of Royal LePage Advisors offered a more subdued description of the industrial sector as ‘a market that is in balance’ and also a caution about the impact of the rising Canadian dollar, higher manufacturing costs particularly energy and global competition.

The industrial sector has been riding the wave of a strong Canadian economy.  There is a projected 3% GDP in 2005, low unemployment and strong employment growth (100,000 jobs in the manufacturing sector in 2005). The Canadian industrial vacancy rate is a healthy 5%.

Toronto’s influence on Canadian industrial real estate

The Toronto industrial market significantly influences the sector nationally. Not only is it the third largest market in North America boasting 730 million sq. ft. of space, it also accounts for half the industrial space in Canada – torontoindustrial.com.

Construction of new industrial space in the Toronto area, led by U.S. based ‘speculative’ developers, has recently added about 14 million square feet. According to Shelia Botting this is about 1% of the national industrial square footage a reasonable proportion of the overall market to be located in the GTA.

Effect of the Toronto greenbelt

Provincial greenbelt legislation, imposing development restrictions around Toronto, has had the predictable effect of raising land prices.  Botting compared the greenbelts constraint on the supply of land to the barrier imposed by the mountains in the Vancouver area of B.C. While land was going up at about 7% prior to greenbelt legislation, it has since risen about 21% in the GTA.  In Mississauga the cost of land, including development charges, is about $700,000 an acre.  Outside the greenbelt in St. Catherines, it is $200,000 per acre, and even lower in other cities such as Brantford.

Rising dollar, higher manufacturing costs, international competition

In spite of the currently rosy state of the Canadian industrial market, Botting cited reasons to be concerned about the future, the rising Canadian dollar, higher manufacturing costs (particularly energy) and global competition.

Information from the Canadian Manufacturing and Exporters Association (see below) indicates significant increases in operating costs and declining selling prices from 2000-2004. According to Direct Energy natural gas prices in Ontario are currently 80% higher than a year ago. Botting indicated that rising industrial net rents now an average of $5.50 psf might not be competitive on the international market.

Supply Chain Changes and Industrial Real Estate

James Reeb, Senior Managing Director for Cushman & Wakeman identified the increased importance of the ‘supply chain’ as a key issue for the industrial sector.  He described how routing of container ships to technically advanced ports and advances in trucking technology for distributing ship containers are making many industrial distribution facilities obsolete. He also expects RFID (Radio Frequency Identification) will radically change industrial inventory techniques and improve supply chain efficiency generating further changes in industrial real estate requirements.  According to Reeb broadband technology will allow for rapid, overnight transmission of architecture and engineering drawings and the outsourcing of building design to developing nations.

In light of the future prospects for the Canadian industrial real estate sector James Ziegel final words of wisdom to the Industrial Conference were "be exuberant but stay rational".

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…

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