The Altus Report: Industrial activity across Canada
as published in Informa’s Canadian Real Estate Forum Magazine – Spring 2019
By Kruti Desai, Manager, National Research Insights and Raymond Wong, Vice President, Data Operations
Low industrial vacancy rates drive rental rates and sale prices to highest levels ever. With limited new supply, users scramble for space.
In this issue of The Altus Report, we discuss industrial activity across Canada.
Investment demand for Canadian commercial real estate continues to be strong across Canada despite uncertainties over US-China trade conditions, the ratification of the USMCA, and ambiguous future interest rate hikes. Altus Group’s Investment Trends Survey showed that investors remain particularly confident in industrial assets amid land and product shortages. And with rising rental rates, high occupancy rates and consistent returns, it’s a landlord’s market. According to the Conference Board of Canada, Canada’s GDP is expected to move ahead by 1.9% this year, with strongest growth in Atlantic Canada, Saskatchewan and BC. With the continued expansion of e-commerce, cannabis production and growing interest from other potential users, it is expected that demand for additional space will outpace new supply in the next few years across well-situated markets. As a result, we are seeing several transformations occur in industrial space. The rise in logistics and distribution companies has increased the adoption of new technologies to enhance supply-chain delivery, optimize operational efficiencies and drive overall revenue.
Emerging Industrial Users Compete With E-Commerce
Strong Industrial Demand and Land Scarcity Keep Vacancy Rates Below 2% in Vancouver and Toronto
Chase for Stable Yields in Industrial Product
Investors continue to scramble for opportunity amid land constraints
More than half of the new supply of industrial product that will be coming to market in the next year has already been preleased. In Q4 2018, approximately 3.8M SF of new supply was completed and almost 2M SF has already been leased leaving an availability rate of 47% in the market. Of total new supply, Ontario alone completed almost 1.7M SF with another 1.4M in Alberta. The overall vacancy rate for Canada’s major markets fell to around 2.6% at the end of 2018, the lowest it has been in almost a decade. In addition to a lack of product, there is also a dwindling supply of developable land, and significantly rising land prices in the last year are putting pressure on the industrial market especially in Vancouver and Toronto. Montreal’s industrial sector comes in second to Toronto in terms of inventory but is vastly aging. The Port of Montreal, however, is showing signs of renewal as older industrial inventory is being snapped up for redevelopment. Like Montreal, geography also plays a factor in development constraints in Vancouver due to surrounding water, mountains and the Agricultural Land Reserve (ALR) leaving a tight supply of vital land in the region and developers continue to scramble to build on any viable land they can manage to get their hands on.
Featured Industrial Transactions
Featured ICI Transactions
Brownfield sites waiting to be unearthed
Although industrial property sales had the second largest investment volume sales in 2018, ICI transactions in Toronto and Vancouver dropped by almost 2%. For Toronto, this may be a result of the new Local Planning Appeal Tribunal (LPAT) process in Ontario. Yet, there is no shortage of buyers. Not only is a lack of new supply not helping the situation, but older supply is being taken out of the equation. In Toronto, the largest ICI land transaction in 2018 was the sale of Bombardier’s Downsview Plant and Airport site to PSPIB Downsview Investments for $825M. It is expected the 371 acres of that land will be redeveloped with a mix of commercial, office and retail. Another noteworthy transaction was the Ontario Power Generation sale of its brownfield Lakeview lands for $275M in South Mississauga. The 177-acre site, which will be located near the Hurontario LRT, is being remediated and transformed into a mixed-use community with greenspace.
With a lack of serviced land readily available, remediation of vacant brownfield sites has gained some attention in the last few years. Many believe it to be a high-risk investment due to a potential lengthy, complex and costly process, but, if all goes well can present major opportunities for new construction, growth in nearby areas and ultimately may increase the value of the land itself.
In Hamilton, one of the oldest and most heavily industrialized cities in Canada with many brownfield sites, is undergoing a large redevelopment plan. In early 2018, 51 vacant brownfield sites were redeveloped in part due to the Environmental Remediation and Site Enhancement Community Improvement Plan (ERASE) grants which began in 2001. About 145 property owners have been approved for environmental studies and 47 projects have been awarded redevelopment grants by city council, which equates to over 380 acres of land. Various uses for the lands have been suggested, primarily cannabis production.
The City of Ottawa’s brownfield redevelopment program also approved a grant for $60M to clean up the Chaudière and Albert Islands/LeBreton Lands for the Zibi mixed-use project. Alberta tells a different story with a history of lands impacted by the oil and gas industry. However, several remediation plans between the municipalities, government agencies and multinational companies have been negotiated for various projects in Edmonton and Calgary.
Toronto’s Eastern Waterfront also presents the potential for redevelopment and is another stretch of land to keep an eye on. Sidewalk Labs, a partnership with Waterfront Toronto, has proposed a mixed-used “smart city” redevelopment project in the Quayside neighbourhood, which is situated on a brownfield land. In 2017, Imperial Oil’s Port Credit Lands in Mississauga sold for $175M to a joint venture by Dream, Kilmer and Fram Building Group. Kilmer specializes in remediation of brownfield sites and has plans to redevelop the site for mixed-use.
The 18.9-acre site of the former Campbell’s Soup Factory in south Etobicoke sold to QuadReal for approximately $45M. The 87-year-old property dates back to 1931, however as a result of retrofitting complications due to its age and size, manufacturing cuts and a shift in production to the US, the company will be relocating to a new headquarters in Mississauga with a significantly reduced workforce. As of mid-January 2019, no development applications had been submitted to the City of Toronto planning department but there is speculation about a potential mixed-use development and will likely require site remediation. In Oshawa, the GM plant closure will leave behind a hefty plot of land that will require extensive testing and remediation efforts and possibly rezoning for any future redevelopment opportunities to attract interest from various buyers.
Redeveloping brownfield sites to ease land shortages may be an enormous opportunity due to their prime locations and adequate infrastructure. Yet, it is a rather expensive undertaking and some jurisdictions are still cautious of identifying lands as contaminated for sites they don’t own for fear of being sued or being liable for a decline in land values.
Industrial Rental Rates Continue to Rise
Built-to-Suit activity fueled by demand for newer, more modern product
With vacancy rates in Vancouver and Toronto below 2% and ongoing supply constraints, developers are left with little choice, but to get creative and redevelop, densify, or build upwards. Many properties transacting lately have been older properties likely poised for redevelopment. Many lack modern technology and high ceilings above 24 ft, now a basic tenant requirement. Montreal’s aging inventory predominately has clear heights less than 20 ft, but its North and South Shore markets are growing. This ongoing trend for clear heights between 24-36 ft has been driving some developers to build on spec as an alternative. Lease terms for built-to-suit projects are often longer than the average 3-5 years for landlords to recover their investments over the entire lease term, preferably 10 years. In Vancouver, the Dayhu Group purchased land in the Delta region’s Boundary Bay Industrial Park in 2013 and built two distribution centres with 36 ft clear ceiling height and state-of-the art racking systems. TJX Canada leased one of these buildings, which uses specialized systems to guide driverless forklifts.
More developers demolish older properties and construct new built-suit properties typically for a single major tenant. In 2015, PC Urban demolished its property situated on a 0.8-acre site located at 1055 Vernon Drive in Vancouver’s Strathcona district. As a joint venture, PC Urban has plans to rebuild and construct a new 104,000 SF mixed-use strata building called IntraUrban Evolution which will include a vehicle repair shop on the ground floor, light industrial on the second floor and office on the third and fourth floors. The building will include dock and grade loading doors with a modern freight elevator system to ensure access throughout the building, and a green roof with outdoor amenity space.
Broccolini also ramped up built-to-suit projects. In Ottawa, Amazon commissioned Broccolini to build a 1M SF fulfillment centre in the southeast end which is slated to open by mid-2019. Due to its rural location, several modifications were made to the site such as connecting hydro and a municipal water system, and roadway adjustments to accommodate the increase in traffic to neighbouring properties. Supply also remains tight in Montreal’s industrial markets with vacancy rates near 3% and rents rising. Broccolini was selected by XTL Transport for a design-build distribution centre in Pointe-aux-Trembles, Quebec, located in Montreal’s east end which was completed in 2018. The older facilities on the site were demolished and replaced by a 335,000 SF warehouse with a clear height of 32 ft and an office building. A railway also runs alongside the buildings with multiple loading docks to allow cargo trains direct access to the warehouse.
Another built-to-suit project by Broccolini will be a new 1.2M SF IKEA distribution centre in Beauharnois, QC which will include a one-storey three compartment distribution warehouse and an office area with amenities. Two of the buildings will include 65 ft and 43 ft ceiling heights with conventional racking storage and the third will include 118 ft ceiling heights with automated storage bay.
Closing the Last Mile Gap
Consumer expectations for same-day or next-day goods are likely to keep growing and the lack of well-positioned industrial space is placing significant strain on retailers and e-commerce giants like Amazon that depend on a network of distribution centres. Amazon Prime alone has about 1M subscribers globally and according to a report on parcel delivery by consulting firm McKinsey, “almost 25% of customers are willing to pay significant premiums for the privilege of same-day or instant delivery”. Retail technology and innovative delivery methods are however gaining strength with the help of automation and robotic technology, self-driving vehicles, third-party fleets or crowd-sourced delivery providers, micro transit and alternative last-mile transport nodes to ensure prompt delivery for customers. The delivery logistics process begins around distribution routes for large-scale movements of goods. The closer the package moves towards its destination, the more dispersed the deliveries. This last stage becomes very costly and inefficient. Companies are now considering investing in multi-tier distribution centres with larger logistics hubs located in the exurbs due to cheaper and available product, and smaller fulfilment centres in denser, urban areas to allow for more efficient deliveries in the city.
Industrial properties near urban centres and transit networks will continue to attract investors and tenants. In the last few years, the industrial sector has seen a lot of new construction activity happen in various urban and suburban markets across the country in the GTA, Ottawa, Edmonton, Calgary and Greater Vancouver’s Pitt Meadows, Delta iPort and Surrey. Amazon will soon have 11 distribution centres in Canada to better service orders from coast-to-coast. Amazon’s newest facility in Orleans, an east end suburb of Ottawa, is strategically located along a major route between Ottawa and Montreal and at a major intersection on the Trans-Canada highway, about 16 km from downtown Ottawa.
In Vancouver’s South Surrey suburb, almost 140 acres of developable industrial land is currently being serviced in the Campbell Heights Industrial Park area. Almost 3M SF of new industrial space is either in the permit-process or expected to be ready early this year. The area will also see owner-occupied built-to-suit facilities such as Walmart’s new sustainable, high-tech fresh and frozen grocery facility scheduled to open by 2022. The centre will be a smaller facility at 300,000 SF but will be a zero-waste facility with more efficient systems and include higher ceilings for automated storage. Walmart’s strategy for an additional node in BC was to better service their BC customers due to capacity constraints at its facilities in Calgary and its third-party warehouse in Richmond.
Competition for industrial space gets intense
E-commerce isn’t the only driver of demand for industrial space and competition is getting fierce, driving vacancy rates even lower. Data centres, film studios, grocery and storage facilities and cannabis growers are among some of the sectors triggering additional demand. However, warehouse conversions can come with some risk. Building retrofits for data centres for example, can have high capital costs and barriers to entry. Film studios seek industrial space with high ceiling heights and because of a lack of supply, older buildings may need to be repurposed and renovated to accommodate these needs
Toronto and Vancouver are some of the largest film and TV production centres in North America. Vancouver has about 2.5 M SF of studio space in Metro Vancouver and due to new supply constraints in the Lower Mainland, many companies are looking to other areas. The Delta city council adopted a zoning amendment about 8 years ago to allow a wider range of industrial uses in the Boundary Bay Airport area. The council also approved a temporary use of a former aircraft storage building as a film studio. According to Creative BC, a provincial agency that monitors the creative economy, BC’s film industry generated $3.4B for the BC economy in 2017-2018. In Toronto, Cinespace Film Studios sold its property on Eastern Avenue to General Motors Canada in 2016 and has leased space from PortsToronto to build a 165,000 SF studio hub at the former marine terminal in the Port Lands. Recently, Ottawa’s planning committee amended its Greenbelt Master plan and approved a proposed $40M new film and television soundstage campus in its west end that will include 40 ft ceilings and is expected to boost economic activity between $25M-$40M annually.
Do more with Less
The intensification of e-commerce and a new wave of alternative uses will spur demand even further. Transformations in manufacturing technology and logistics are changing the minimum requirements for facilities. This trend is creating opportunities for more build-to-suit projects and forcing developers to rapidly move ahead with construction of new supply to meet tenant needs. The amount of readily available land in major centres is also becoming constrained shifting interest towards product in smaller markets due to more availability and better pricing. Overall, the industrial market remains strong with increased demand from developers, investors and users. Yet, at the current rate of product shortages, aging buildings and rising rents in major markets, the market will likely hit an inflection point prompting a reevaluation of existing inventory for conversion and redevelopment.