Relentless demand for Canada’s storage and distribution warehouses is propelling this segment of the real estate market to a new level, with industrial properties in and around cities like Toronto and Montreal boasting some of the fastest rising prices in the world.
The market for storage space is so strong that the national vacancy rate has fallen to a record low of 1.6%, according to commercial real estate services and investment firm CBRE Group Inc. Supply is so tight that some landlords have been able to raise rents more than 100 percent in tenant turnovers and lease renewals.
The returns have attracted some of the most sophisticated real estate players in the world. In June, Prologis Inc. PLD-N, a major San Francisco-based industrial property owner, purchased land in the Greater Toronto Area to develop a new warehouse. The $500 million purchase price was nearly $2.5 million an acre, more than double the rate five years ago.
Still, some fear it may last longer. Major retailers have warned that the e-commerce boom has reached its limit, and this spring Amazon spooked investors by announcing plans to sublet part of its warehouse. At the same time, interest rates have skyrocketed, making commercial mortgages more expensive, and relentless inflation has sent development costs skyrocketing.
So far, however, industrial properties here have defied fears of an industry-wide cooling, and markets in four Canadian cities are the tightest in North America. “The party isn’t over,” said CBRE Canada Vice President Paul Morassutti. “It may not be quite the rage, but it’s definitely not over.”
In mid-August, Summit Industrial Income REIT, which exclusively owns Canadian warehouses, released quarterly results and revealed that its average rent increase this year on lease renewal or tenant turnover was 46%.
Summit also reported that the national average rental rate across the industry hit an all-time high of $12.25 per square foot. Five years ago it was less than $7.
Warehouse demand took off around 2016 when e-commerce picked up steam and then exploded during the pandemic as consumers relied heavily on online shopping. Although e-commerce growth has slowed lately due to the lifting of lockdown restrictions, online sales are still growing overall, albeit at a slower pace.
CBRE estimates that for every billion dollars in online sales in Canada, approximately 1.25 million square feet of warehouse inventory is required. This means an additional 90 million square feet could be needed over the next five years. Canada currently has 1.9 billion square feet of industrial space.
The need could be even greater if just-in-time inventory systems become more prevalent, as companies increasingly turn to onshore supply to alleviate the supply chain issues that have plagued them in the past. over the past two and a half years.
High transportation costs have also driven up the value of industrial properties, which Morassutti says is understated. Typically, logistics and transportation expenses account for 70% of supply chain expenses, while real estate only accounts for 5% of the load. This means that for every dollar saved on logistics – by having warehouses closer to the customer, for example – a company can theoretically pay 14 times more in rent.
This month, Summit revealed that it had recently re-rented a one-story warehouse in Markham, Ontario, northeast of Toronto, after just a month of being unavailable and raised the monthly rent by 42%. At another GTA property, the REIT re-let the space with no downtime – and a 117% rent increase.
Shares of Summit, which trade on the Toronto Stock Exchange, have soared 223%, including distributions, over the past five years. Rivals Granite REIT and Dream Industrial REIT, which have a mix of Canadian and international properties, gained 98% and 86% respectively. The equivalent return of the S&P/TSX Composite Index is 57%.
Given that residential real estate has cooled so rapidly in Canada over the past six months and that commercial sectors such as office buildings have also struggled, there are fears that warehouses could also be affected. The main concern is that with the pace of construction at an all-time high, the market will eventually be flooded with industrial properties.
However, even after the completion of all properties currently under construction, the total available square footage will only increase by 2.3%, according to CBRE.
As for fears that Amazon would scale back its operations in the United States, which chilled the entire industry, that simply did not materialize. “What’s interesting is that we’ve been watching the market very closely to see what Amazon is doing,” Granite REIT chief executive Kevan Gorrie said on a conference call with analysts and investors. this month, “and so far there are almost none, it’s negligible. , the number of assets that Amazon is actually looking to sublet.
Because the industrial market has been so hot, it is widely believed that there will be some easing, especially in other countries. “Some U.S. markets don’t have a lot of land constraints or development constraints, and those markets are seeing rents stabilize much faster,” Dream Industrial CEO Brian Pauls told analysts and investors at the conference. the company’s quarterly conference call.
“But in the GTA, certainly, and in Montreal, what we’re seeing are rents that continue to grow,” he said.
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