If one were to only look at manufacturing jobs, the picture for industrial property in the Greater Toronto Area would be gloomy. The GTA has shed 33% of its manufacturing jobs over the 10 years.
That grim news, however, obscures a brighter picture for industrial in North America’s third-largest – and soon to be one it’s busiest – markets, Colliers’ Scott Addison told the audience of the Real Leasing conference in Toronto this month.
Manufacturing jobs may be disappearing, but with the industry increasingly moving to automation, it is not current to say that manufacturers are disappearing. “Using manufacturing employment as a predictor of the industrial market is a very poor metric in my opinion,” he said.
An automated plant requires the same square footage, or more, than a comparable old-style facility employing hundreds or thousands of workers. Manufacturing also accounts for only about 20% of the demand for industrial property, so any manufacturing declines will have at best a moderate impact on overall demand.
The big three of demand
So where is the demand coming from? Distribution, warehousing and transportation, said Addison, who is Colliers’ Eastern Canada President.
The GTA is adding about 100,000 people to its population base every year, or about the population of Barrie, Ont. “That is big, and new retailers are entering our market. So you have Target and Nordstrom, two of the larger ones.
“As the population grows, and the number of retailers grows, the flow through the supply chain is increasing, therefore you need more warehousing and more distribution space.”
The Colliers executive also predicted that other less well-known trends would impact demand such as the widening of the Panama Canal, set for completion in 2014. That will allow the biggest cargo ships to reach the North American east coast from China, meaning ships carrying 12,500 containers, or about double the size of current ships, will be plying into harbours such as Halifax rather than stopping at west coast ports as they currently are forced to do. The warehouse situation is further complicated by the fact that ocean-going freighters are now sailing slower in an effort to save fuel, which could less frequent deliveries of critical goods.
Yes, more industrial space will be built
Asked about whether average rents in the $5 per square foot range will deter new industrial construction in the GTA, Addison noted that for new, well-located distribution centres, the rents are closer to $6 net rate.
“At $6 a foot, we are going to start seeing some of the private developers, who already own land that is zoned, serviced, ready to go” – many of which own their own construction companies, leading the charge. “They have a standing payroll, they are going to get going on this and they will lead the market.”
He does not expect institutional players participating in that initial round of industrial developments, noting that they have to buy land, get developmental approval and hire builders.
“They are going to need at least $6.75 a square foot net to kick that off. The good news is that we are at $6 right now, we are within roughly 10% from where we need to be to be to start kicking off spec development from the institutional side as well.
“Spec development is about to heat up in Toronto,” Addison later emphasized.
Build `em high
While prevailing clear heights are running from 28 to 30 feet, heights of 36 feet will likely become the new standard for the simple reason that it is the de facto standard for the U.S.
Addison does not expect the extra height to be a deal breaker for developers. “Keep in mind what drives the clear height has more to do with material handling, racking systems and fire capacity of the buildings rather than construction costs. It doesn’t cost dramatically more to go up a few more feet on the site.”
He is also seeing more demand for on-site trailer parking at distribution facilities. That’s been driven by a doubling in the cost to park trailers at off-site locations in recent years. Considering that some retailers have thousands of trailers sitting and racking up rental costs, not to mention the fuel and time to shuttle them back and forth to DCs, the demand for secure trailer parking on their sites is a powerful and growing requirement.
We can rebuild it
On the subject of refurbishment of older, less functional space that is nonetheless well located, Colliers has detected three distinct trends.
“The first has been `raise the roof,’” said Ken Norris, Managing Director of Toronto Region with Colliers. His example was the recent roof raising of the Planters Peanuts distribution centre north of Downsview Park in Toronto, which had its roof, raised by 18 feet and added an addition 1.2 million cubic feet of warehouse space.
The second trend the Colliers executive has identified is the outright demolition of buildings that just don’t make economic sense to refurbish. The prime example he gave is Kingsett Capital’s newly constructed building for LG Electronics along Highway 400.
Finally, some industrial property owners choose to convert height challenged buildings to office space. One such repurposing is GE Capital Real Estate’s conversion of its 32,000 sq. ft., 16-ft clear height property to Class A office space at Steeles and Woodbine. The owner is leasing the property at $30 per sq. ft. gross, Norris said.