Mike Jager, co-founder of Rosefellow. (Courtesy RoseFellow)

Municipalities will need to change their views and allow excess space in power centres and shopping centres to be used for last-mile distribution centres as demand for well-located industrial spaces surges.

That was one of the conclusions from a panel discussion on Montreal’s industrial market at the Montreal Real Estate Forum, held virtually on May 12 and 13.

“This pandemic has changed the nature of our business and pushed us 10 years ahead in terms of online sales and online demand,” said Jean-Philippe Dubé, senior vice-president, development at Fiera Real Estate.

Retailers need to be flexible and the ideal solution for many would be to have front-facing stores and very efficient shipping capacity in the back, he said. Many shopping and power centres have excess land or vacancy that can be reused for those purposes.

The distribution centres “don’t need to be these industrial boxes that we’re used to seeing at the end of an industrial park,” Dubé said, and new construction can be fine-tuned for urban areas.

“I think this is really where we’re going (and) cities will have to adapt to that.” It won’t be easy, but retailers and developers are trying to adapt to the recent rapid changes and cities will have to do likewise, he said.

Cities need to compromise

While there is significant demand from industrial tenants for last-mile distribution centres in shopping centres, developers are faced with the problem that cities don’t want to make zoning changes to accommodate them, said Ian Quint, president of Groupe Quint.

“Their arguments are ‘We don’t want trucks driving through the middle of the city, we don’t want the pollution.’ ” Cities also believe the changes would lead to a decrease in the value of retail properties and, in turn, municipal evaluations, Quint said.

“We haven’t been successful at all in converting any of those centres into last-mile distribution spaces, but it’s certainly not for lack of trying.”

Groupe Quint has had cases where it signed leases with industrial tenants, thinking it could get zoning changes or fit the tenants in existing zoning, only to have to cancel the deals.

The obvious solution, Quint said, is that cities are going to need to compromise and allow showrooms or retail uses in the front and distribution centres in the back.

Bruce Traversy, head of investments at Dream Industrial REIT (DIR-UN-T), said cities’ negative views of trucks in urban areas may change once electric trucks become part of the equation. “It becomes a lot less destructive to noise pollution.”

Politicians will need to change their opinions of industrial spaces and “stop looking at industrial boxes as low-employment, big-box facilities that don’t bring any value to a city,” said Mike Jager, co-founder of RoseFellow.

Today’s distribution centres bring jobs and activate local economies, he said, using Amazon (AMZN-Q) as an example. Amazon’s average fulfillment centre is 800,000 square feet and employs 1,500.

“That’s 1,500 potential people who will be buying a home, renting a property, eating at a local restaurant, shopping (and) doing the groceries.”

Industrial is “a very hot commodity” in Montreal

Mark Sinnett, executive vice-president, capital markets at JLL. (Courtesy JLL)

Montreal has seen a resurgence of its industrial sector since 2017, noted Mark Sinnett, executive vice-president, capital markets at JLL. Industrial is “a very hot commodity right now.”

New industrial builds have almost doubled in the past four years and there are now speculative builds. Yet vacancy rates remain below two per cent with supply not arriving quickly enough to meet demand and land prices for development reaching new highs, Sinnett said.

With demand through the roof, Groupe Quint is looking at acquiring industrial properties that it previously would not have considered, as well as properties with lower clearances and “some hair on them,” Quint said.

Rental rates “that we never dreamed of previously” are being achieved and, as space is limited, “users are going to have to pay whatever someone that has the space asks of them,” he said.

Quint said the only stumbling block for increasing property values is that historically low interest rates are bound to increase, which will limit what buyers can pay for buildings.

And, some small and medium-sized industrial tenants will hit a maximum rent threshold.

Sinnett said there have been several transactions in Montreal in the past six months at more than $170 per square foot, when not long ago, $75 per square foot was considered a benchmark.

Panelists agreed transactions of $250 per square foot in the Montreal market are not far away.

Montreal has a great growth profile, Traversy said: “We’re reasonably bullish on Montreal and we expect on a relative basis it’s going to perform well because there aren’t options.

“People are coming to Montreal partly because they can’t find buildings in Toronto, but also because Montreal has some great fundamentals.”

Montreal’s industrial market has not peaked, Jager said.

“For 30 years, it’s been a tenants’ market here in Montreal. It’s the first time we actually see rents increasing and I think we’re just adjusting to those multiple years of $5 net rents.”

Added Jager: “We haven’t hit the cap. It’s going to keep growing. We’re just at the beginning stages of it.”