Rebecca Rosecrans
Industrial REITs are expected to have a positive run this year, driven by healthy manufacturing activity and growing demand for distribution centres as the e-commerce market expands, according to a report by Canaccord Genuity.
It suggested a potential gain by the industrial real estate investment trust sector based on the lower Canadian dollar "as Canadian exports become cheaper to foreign consumers, which drives growth in manufacturing and distribution."
"If that happens, there will be more demand for industrial space and that can allow for lower vacancy rates and a higher rental rate in particular markets, such as Ontario and Quebec," Mark Rothschild, managing director and real estate analyst with Canaccord Genuity and co-author of the report, said in an interview while suggesting Pure Industrial REIT and Dream Industrial REIT as specific beneficiaries. "It's not something that we've seen in a material way yet, but it's something that we think there's a good chance we will see."
Dream Industrial said it has seen an increase in interest from new potential renters in the past few months. The Toronto-based REIT said this is especially the case in Central and Eastern Canada. "Demand for industrial space is closely correlated to GDP growth, and both the U.S. and Canada are forecasting growth," Brent Chapman, chief executive officer of Dream Industrial REIT, said in an e-mail.
In their first-quarter review of the REIT sector, Neil Downey and Michael Smith of RBC Dominion Securities said they expected the weaker loonie would support industrial demand this year. "While the property portfolios of the listed industrial REITs are predominantly distribution and warehouse space, they clearly also include a minority proportion of light manufacturing and flex-space. Over all, we believe a weakening trend in the loonie is more influential for industrial demand, versus other property sectors such as office or multiresdential."
About a quarter of Pure Industrial's portfolio is in light manufacturing, and the Toronto-based REIT aims to increase the number of light manufacturing tenants in its properties, said Andrew Greig, director of investor relations for Pure Industrial REIT.
Mr. Rothschild highlights distribution as an area in which both Pure Industrial and Dream Industrial – Canaccord gives both a "buy" rating – operate. The move to the e-commerce sector, which needs distribution or fulfilment centres, has been a trend in the past year.
To illustrate, since the beginning of the year, property purchases in the industrial REIT sector hit about $620-million measured by square footage, with the average square foot for transactions greater than $10-million being $107. That's good enough for third spot in Canaccord's Aug. 17 review, with retail coming in sixth, nabbing just more than half that amount. In 2014, the retail REITs had $1.2-billion worth of transactions, while industrial REITs had $787-million.
"As retailers reallocate some of their focus from retail stores to e-commerce sales and optimizing supply chain networks, industrial real estate should continue to benefit from the potential investment and development opportunities," as more distribution space is needed to run those online stores, RBC's Mr. Downey and Mr. Smith noted. "Location of property becomes increasingly important, as new fulfilment centres should ideally be located close to a highway, within proximity of urban populations, and have the capacity to handle the volume of smaller transactions."
The majority of Dream Industrial's portfolio is located in those areas, in close proximity to major highways and transportation hubs including the Greater Toronto and Greater Montreal areas, Mr. Chapman said.
In February, Pure Industrial acquired 60 acres of development land in Vaughan, Ont., for $44-million to build a distribution and sorting facility for FedEx.