Rising land and construction costs in Atlantic Canada are stifling new industrial development in the region at a time when demand has risen alongside a fast-growing population.

During an industrial-focused panel discussion held at the Atlantic Real Estate Forum earlier this month, developer Jonah Bonn of First Bay Properties said his company’s industrial development work is at a standstill.

Bonn, who moved his business to Halifax from Ottawa, said costs in Atlantic Canada have not reached the levels of Ontario. However, swelling land and construction costs have changed the math on whether a project is viable because regional rents also do not reach Ontario levels.

“What I'm seeing is - and it's not surprising to me at all - is industrial land costs upwards of $15, $16 or even $17 per square foot,” Bonn said. “So, what does that mean for development…. If you take $17 a square foot, which works out to roughly $750 an acre.”

Industrial development numbers don't add up

Bonn said a prototypical industrial development will have 25 per cent land coverage, meaning four square feet of land is needed for every one square foot of building. This takes the cost of land for one square foot of building to roughly $68 before building costs, which would add approximately $250 per square foot, bringing it to almost $320 per square foot for a completed building on the purchased land.

Yet a realistic rent expectation might come in around $18 per square foot.

“I pull up my calculator and take $18 and divide by $320 and it's like 5.6 per cent,” Bonn said. “Like, my cap rate calculator doesn't go that low. So, I can't do it. I cannot build because I don't have that capital stack.

“My capital stack is essentially private investors, typically impatient. They want returns almost out of the gate. Their horizon is not institutional, in the sense that it's not super-long term. And therefore, I'm out of the development business due to land cost, partially, but also construction costs.”

He added: "I'm on standby right now. My shovel is in my trunk, but it's clean. I'm not digging.”

Differences across Atlantic Canada

Within Atlantic Canada, there are regional differences, however. Gordon LaHanky, president of Atlantic Commercial Properties, said serviced land in Moncton is available for clients seeking industrial space.

“There's 230 acres of serviced land (available in Moncton),” LaHanky said, “and there's 200 acres coming on stream beyond that in the next two years, 2026 and 2027. So, when you compare land cost, you're looking at approximately a third to one quarter, potentially, of the price of what it would be in Metro Halifax.”

Even so he admitted, land costs have risen in Moncton. “So, I'm accustomed to acre prices that were $80 to $120… let's say four years ago, five years ago,” LaHanky said. “Today, that's $250 plus.”

Record attendance at Atlantic forum

The Nov. 4 forum at the Halifax Convention Centre drew a record of over 700 participants, befitting a region experiencing record growth in both population and economic development.

In a wrap-up of major project activity in the region, defined as projects over $50 million, attendees heard there are 471 projects underway in Atlantic Canada, at various stages of development.

Patrick Brannon, senior researcher and director of major projects for the Atlantic Economic Council, said the projects carry a long-term economic value of $320 billion, with a record $18.3 billion expected to be spent in 2025. 

The region also expects to benefit from incoming major projects and defence spending. 

“There's going to be spending, and it's going to happen here, and there's going to be a tremendous amount of spinoff,” Lindsay Construction president and CEO Cory Bell said. “That spending, it's going to happen in the next couple of years, it’s going to give us a seven- to 10-year runway of folks that are going to be here, needing warehousing, needing light industrial and that's going to be right across Atlantic Canada.”

Forum attendees at the industrial panel, moderated by Michael Brown of Avison Young, also heard demand for industrial space is coming from existing clients and non-traditional channels.

“This past year, we had five tenants that needed to expand and double their space,” LaHanky said. “I've never had that before. So, there's growth there.”

One example of a company ramping up in the region is Kal Tire, he added, which opened a large distribution centre in Moncton this year as well as a number of service shops. “They were never in Atlantic Canada, but now they are evolving nicely in Atlantic Canada,” he said.

LaHanky said industrial space is also being sought for repurposing for recreational activities like pickleball or new ventures like brewpubs. 

The demand for space is pushing rents higher and the panel discussed the need to remain competitive.

“I am proceeding with caution (on rents), because I think we're sort of pushing the level where, you know, gross rents may be stretching some people's abilities to service them,” Bonn said.