Faced with industrial property crunch, businesses look beyond traditional design and location

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Scarcity in the industrial real estate market is forcing brokers and clients to get creative in their hunt for space.

The national vacancy rate is just 2 per cent, and unlikely to increase any time soon.

“Demand surpassed supply by a long shot over the course of the pandemic,” says Brad Dykeman, executive managing director, GTA Suburban Markets at Cushman & Wakefield.

A lack of available land for industrial use, rental prices, supply chain issues and increased cost in building materials have all contributed to the current situation.

“E-commerce increased much quicker than anticipated, and fuelled new consumer habits, which, in turn, kept goods in warehouses,” says Andre Bussiere, senior vice-president of industrial at Cushman & Wakefield in Montreal.

In Toronto alone, there was on average a 20-per-cent shortfall between announced speculative developments and what was actually delivered to the market.

The GTA introduced over 13.3 million square feet of new supply to the market in 2022, which is the largest amount in the past 10 years. It is not a lack of intention creating the spread, says Dykeman, but the time required to obtain municipal approvals and build the product.

“It’s not surprising,” he says. “There is basically nothing out there in terms of vacant, available industrial space.”

New space is the most viable alternative for companies looking for opportunities in the GTA, he adds.

With Toronto’s vacancy rate at 0.9 per cent, it’s a challenging and competitive market with rising rents and prices for industrial space.

As Montreal slowly returns to a 1.9-per-cent vacancy rate, the market there is softening very slightly and only in comparison to Vancouver, which is sitting at a 0.5-per-cent vacancy rate.

The squeeze in available options to satisfy ever-increasing demand for space has many brokers seeking out unconventional or creative alternatives for their clients and prospecting for properties that can be repurposed.

“Obsolete or dysfunctional industrial buildings are holding their value in this market,” Dykeman says. “There is demand from developers and owner-occupiers for brownfield sites, which, when redeveloped, clean up environmental issues, improve the functionality of the buildings and are an overall boost to the local area.”

In Toronto and the GTA, this is one of the most accessible ways to find space for industrial use.

Older, less desirable hotels or underused suburban office buildings along the transportation corridors and on the outskirts of the city are prime opportunities for redevelopment as cold storage facilities, warehousing or last-mile e-commerce space, says Dykeman.

Sean Ungemach, vice-chairman of Cushman & Wakefield in Vancouver, cites vertical development as another creative solution for the future of industrial spaces.

“In Vancouver most industrial development sites are already brownfield sites,” says Ungemach, addressing the environment as a constant consideration for the next generation of investors and consumers.

With less than 1-per-cent vacancy in Vancouver, Ungemach notes there truly is no land available for purchase by a manufacturer or warehouse-based business.

Scarcity of available land, coupled with the high acquisition cost, forces developers to get creative. “For many sites, the only option is vertical,” he says.

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Some industrial spaces are now double-layered or stacked with multiple floors and 80-foot ceilings with massive ramps to enable accessibility to the upper floors by full-size trucks; others are being built with large-scale elevators used to accommodate the need to build up instead of out when looking to maximize available space, he explains.

“In the future, engineers will have to continue to find ways to efficiently move product vertically,” Ungemach says.

While there are some multistorey industrial buildings in use in markets across the U.S. and Western Canada, the Toronto market has not yet seen this kind of space built.

Also, in markets like Toronto and Vancouver with extremely low vacancy and high demand, newly planned, speculative industrial buildings generally are preleased well before completion.

Ungemach points out that this kind of bidding process with prospective tenants has taken hold in the industrial real estate market, which is “great for landlords but bad for tenants.”

Looking for rental opportunities outside of these high-priced centres is the next-best option and one that makes the Alberta market attractive.

“The difference in Alberta is we have land inventory at reasonable pricing for developers – compared with Vancouver and GTA,” notes Tracy Taylor, executive managing director at Cushman & Wakefield in Calgary. “It’s the most competitive market in Canada.”

According to Taylor, businesses that are faced with space shortage in markets like Toronto and Vancouver would be remiss to not seek out alternatives in Alberta.

“It’s important to understand the nuances of each potential market, submarket, developer and landlord to negotiate the right deal,” she says.

Factors like lower labour costs could make moving into tertiary markets more realistic for some businesses.

Redrawing the boundaries of more traditional GTA industrial markets may be warranted as well.

The lack of supply, timing of new supply, competition for labour and increased rental rates fuel growth in nearby municipalities once considered secondary but that are now viable options.

Looking at the Golden Horseshoe and beyond, the GTA industrial market is a major player in global logistics and manufacturing and thinking of it on a larger scale will help businesses determine their real estate requirements, says Dykeman.

In Montreal, where vacancy rates have begun to come back to the national average, demand for space was phenomenal through the COVID-19 pandemic, says Bussiere, adding that Montreal has a strong manufacturing sector.

“With the shortage of labour, a lot of companies invested in automation, and that created movement in the market,” he says.

Three years ago, before the pandemic, vacancy overall was around 7 to 8 per cent in Montreal. For Toronto, a 5-per-cent vacancy rate is considered healthy and may take up to 10 years to achieve again, if ever, says Dykeman.

“The cost per square foot has increased by 135 per cent over the last five years,” he explains.

Looking ahead to when the markets may find an equilibrium again, he says, “we don’t expect it to happen any time soon.”

Advertising feature produced by Globe Content Studio with Cushman & Wakefield. The Globe’s editorial department was not involved.