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By Jason George, Vice President, Property Tax | December 30, 2020

A pandemic good news story

More than any other asset class, industrial properties across the country are navigating through the pandemic storm in good shape. There are two main contributing factors: e-commerce and safety stock.

Acceleration of online shopping during COVID-19 propelled demand for industrial facilities. To provide timely delivery, companies have been increasing inventory at properties close to customers. And, starting with the US-China trade war and accelerated by COVID-19, inventory management practices shifted to expand safety stock to alleviate supply disruptions. E-commerce distribution facilities quickly became critical to the consumer supply chain. This expansion of safety stock will continue, further increasing the need for industrial space.

From 1 million sq ft+ warehouse distribution facilities, to manufacturing plants, to small flex spaces that combine warehouse/office units in industrial parks – demand, vacancy, rent and sale prices are strong for all types of industrial facilities in all of the major market.

Throughout the pandemic, transactions have been consistent with pre-pandemic levels in terms of sales price per square foot and cap rates.

Moreover, demand is driving spec construction of new industrial space throughout Canada.

Industrial building, inside

There’s lots of confidence in the industrial market, especially with the upswing in e-commerce. Supply is tight, rents are increasing steadily, vacancy across the major markets is low and stable. Industrial is a very attractive asset class today and going forward.

Jason George

Vice President, Property Tax, Altus Group

Industrial availability 2020

Source: Altus Group

National property transactions by asset class (H1 2020 vs. H1 2019)

Source: Altus Group

Industrial under construction & availability Q3 2020

Source: Altus Group

Expect property tax pressure on this asset class

Given how well the industrial asset class is performing, owners, investors and developers should prepare for potentially significant property tax increases.

Municipalities are in critical need of tax dollars. Yet with many commercial properties experiencing closures and reduced capacity as a result of the pandemic, property values are falling in many sectors, among them retail, lodging, hospitality, entertainment and office. The taxing authorities will be looking to the industrial sector to help offset the pain. There could be increases of as much as 20% for industrial properties in major centres.

This demands even greater vigilance managing your property tax expense. Consider opportunities such as the following that can drive reductions in assessed value and reduce tax liabilities.

Looking forward: industrial will continue to be an attractive asset class

Industrial markets across Canada have been extremely resilient during this economic downturn. This positive trend is likely to continue, as will demand for industrial space in most markets. This is similar to what is happening in the US. Global commercial real estate investment management firm JLL projects2 a need for an additional one billion square feet of warehouse and distribution facilities in the US by 2025 to meet e-commerce demand. It will be important for owners and investors of industrial properties to ensure that property tax does not represent an obstacle to this success story in Canada.

Jason George

Vice President, Property Tax, Altus Group

Develop a tax mitigation strategy

A systematic tax mitigation strategy should be a priority. Property assessments are subjective and vary according to location, valuation method, special use, equity and uniformity with other properties. There may be opportunities to achieve significant value reductions by reviewing your assessment using different approaches and comparisons such as the following.

Equity comparisons are particularly important at this time

While the assessment value of an industrial asset may reflect the market value of the property, property owners may still be paying more than your fair share of tax. If your property is assessed at market value, for example, while similar properties are assessed below market value, the assessment may not be equitable, and your property may be entitled to a lower assessment. Experienced property tax professionals can help to determine if an appeal is warranted by reviewing data from a number of sources and comparing capitalization rates to calculate equity value.

Impacted by the pandemic? Maintain detailed records

Some industrial properties have been negatively impacted by the pandemic. In situations where you are experiencing financial hardship directly related to COVID-19, such as rent collection issues or exceptional business revenue loss, or the property has been subject to government mandated shutdowns or other restrictions, track these occurrences and related costs. These may be instructive for a potential property tax assessment appeal.

It’s also important to respond to any Requests for Information by the assessing authority on a timely basis to ensure you don’t lose the right to file an appeal.

For properties under development, consider the merits of a classification review

Changes in use, demolition and construction can all impact the assessed value, classification and ultimately, property tax payable. For example, property tax reclassification may be warranted in the early stages of a development project when taxes are unrecoverable because there is no tenant yet in place. Or when retooling a property is taking place. Or when activities might be considered agricultural. Finding a basis of appeal based on classification could potentially deliver millions of dollars in tax savings.

For acquisitions, be aware of potential future tax liability

When purchasing any type of industrial property, identify potential risks or exposure to fluctuations in past, current or future years’ tax liability to determine exactly what the property tax implications will be. If, for example, a property is assessed at $10 million and the purchase price is $20 million, the assessing authority could revalue the property for the next taxation year, or the municipality could file an appeal to increase the assessment. Or, if a purchaser acquires a property that is currently being used as a warehouse, with the intention of leasing it to a manufacturing operation, future property taxes will be substantially higher.

Managing Property Taxes Through a Pandemic report cover

Manage property taxes for all of your assets, through the pandemic

To help you closely align property tax mitigation strategies with the current marketplace, this white paper presents a current picture of the challenges facing nine distinct asset classes in the time of COVID-19, along with steps to mitigate the impact of this consequential expense.

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