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Home > Real Estate News Market fundamentals fuel industrial-strength optimism Tight land supply, robust demand cast sector in a bullish light
TERRENCE BELFORD
Special to The Globe and Mail
02/01/07
Industrial real estate, once the overlooked stepsister to the powerhouse office and retail sectors, has come into its own.
Vacancy rates run at less than 7 per cent in all major centres save for Halifax and Montreal. Investor interest drove sales up 73 per cent to $7.1-billion last year and capitalization rates for the few properties that actually make it to market sit at anywhere from 5.7 to 7 per cent.
"What can I tell you? It has been a very good year and next year [in 2007] we expect much of the same," says John Haire, vice-president and national director of industrial sales at Cushman & Wakefield LePage Inc. in Toronto.
The definition of good year depends on where you sit, however. For tenants, those tight vacancy rates mean facing a tough time finding space for new buildings or to expand operations. The steady economic growth of the past seven years has seen businesses grow at a faster rate than the industrial market can accommodate them.
In Toronto, vacancy rates are just 5.1 per cent, with about half the available space coming from old, outdated industrial buildings with low head room and narrow bays.
In Vancouver, space is at a premium. Surrounded by the sea, the mountains and the U.S. border, the only way to grow is east and, there, provincial restrictions on the conversion of agricultural land to any other use has firmly wedged a cork into industrial expansion.
The situation is acute in Calgary where the vacancy rate for the 100 million square feet of space the city has in its inventory is less than 1 per cent.
"It is a squeaky tight market," says Steve LeLiever, vice-president of industrial in the Calgary office of Cushman & Wakefield. "If you need to move from your existing premises into, say, 90,000 square feet of new space, there is not much available even if you are willing to build.
"There is precious little land ready to bring to market and what there is will trade for record prices."
In fact, the City of Calgary is about to auction 36 industrial lots, from 1.5 to three acres. Reserve prices will be in the range of $430,000 to $440,000 an acre. What they wind up trading for will be at a considerable premium, Mr. LeLiever says. "They will undoubtedly go for $500,000 plus. A year ago, you could get an acre for $375,000; today you are looking at $550,000 -- if you can find anything."
The only option is to head out of town to the east or north and try to acquire land that is partly serviced. "If you need 10 acres, that is where you go," he says. "You pay between $275,000 and $300,000 an acre and also shoulder the cost of drilling a well for water and finding some way to deal with sewage yourself."
The Greater Toronto Area faces a similar situation. With little land available in suburban areas, industry is now moving further afield to outlying Ontario cities, such as Milton and Brantford. Even then, land costs are ticking upward with a metronome's regularity.
"In 2004, land [in the City of Toronto] went for $700,000 an acre. This year, we are looking at $750,000 an acre," Mr. Haire says.
Despite rising prices, development of industrial land continues to be profitable because of the low cost of capital, says George Carras, president of RealNet Canada Inc.
"Look at it this way, every 50-basis-point drop in the cost of financing means a developer can afford to pay almost $140,000 more an acre," he says. "The low cost of money offsets the rising cost of land."
Another problem facing small developers or corporations wanting to build their own plant is that much of the land that will be coming on stream for the next five to 10 years is already held by major developers and they have little interest in selling to third parties when they have the option of developing it themselves.
"They hold the land and they are only interested either in selling it in large chunks or using it to build big projects for their own large industrial clients," Mr. LeLiever says.
Interestingly, some companies that made their name in industrial properties have moved out of the field while others better known for commercial and retail portfolios are moving in.
Dundee Real Estate Investment Trust, for example, won its spurs by creating an industrial portfolio that now totals eight million square feet. For the past few years, however, it has moved from industrial into office space, and now holds nine million square feet in that sector.
"It is simple economics," says Michal Cooper, the REIT's vice-chairman. "Our cost of money is about 5.3 per cent to 5.4 per cent. We were looking at cap rates of 8 per cent to 8.5 per cent in the office sector. In industrial, they had fallen to 6 per cent. If you do the math, then you have to pursue office opportunities.
"Now, office is down to 7 per cent and industrial is starting to climb back up in some areas. For the first time in five years, it may be time to start looking at industrial again."
A complicating factor is that investment giants that manage portfolios for pensions funds and institutions see industrial as an attractive addition to their portfolios as well. With deep pockets, they can outbid most of the competition. Oxford Properties Group Inc., for example, had three million square feet three years ago of industrial space and is now on its way to five million, says Paul Brundage, executive vice-president.
"It is part of our diversification strategy," he says. "We have decided to become a more balanced company, not just holding long term but entering into areas where we can create value for our shareholders as well."
Oxford is one of those very big companies now holding large chunks of industrial land, having picked up 100 acres for development in Edmonton. It is also creating a one-million-square-foot distribution center in Vaughan, north of Toronto.
Even the bad news is not so bad, says Bob Mussett, senior vice-president for the Atlantic region in the Halifax office of CB Richard Ellis. Halifax is one of the two major cities with vacancy rates above 7 per cent; the city reports 8 per cent.
"All in all, that is pretty good," he says. "About half that rate is from new structures, which will be taken up in a reasonable time frame because of the demand for new space. Older properties will find other uses."
In industrial real estate, even the bad news is pretty good. [ Search FAQ | Submit Question to This Category | Home ]
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