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An old DuPont Canada plant in Toronto's Scarborough neighbourhood has been sold and torn down. It's to be replaced by the nearly 300,000-square-foot Venture East warehouse, as shown in this rendering, which is to open in the second quarter of 2019.

Big-city dwellers have come to expect multiple bids and record-breaking prices for teardown properties in older, up-and-coming residential areas, but a red-hot market with competing offers for old factories in Toronto’s inner suburbs? Who knew?

Even industry insiders who saw the trend coming sound surprised by how fast e-commerce is turning around the fortunes of industrial areas in Scarborough, Etobicoke and Mississauga, places that once languished with lots of functionally obsolete manufacturing plants (ceilings too low and loading docks too small for new super-sized trucks).

As a trend, the reshaped demand due to e-commerce warehouses in these areas is no threat to the growth of gigantic, far-flung distribution centres.

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Instead, e-commerce and traditional retailers are discovering ways to create complementary supply-chain links in inner suburbs – subwarehouses with far better “last mile” access to dense neighbourhoods; locations that allow some of the costly driving to be done when roads are not congested; facilities where goods can be transferred to smaller vehicles better suited to narrower city streets; places that are accessible to a work force reliant on public transit; and storage for e-commerce’s large numbers of returns.

While online shopping is undercutting demand for traditional bricks-and-mortar retail spaces, it is also quietly sucking up lots of previously overlooked factory-style real estate.

“Historically, we’ve operated at 5- to 7-per-cent availability rates,” says Ben Sykes, an industrial specialist and principal at real estate services firm Avison Young. “Five to 7 per cent is typical of what we considered a healthy market. Now, partly because of demand for last-mile locations, we’re below 2 per cent in the GTA, and some submarkets in Peel and the city of Toronto are sub-1.”

As Peter Garrigan, managing director for Colliers International’s GTA industrial practice group puts it: “We’re talking record-low space availability. Even people who’ve been around the office for 25 years haven’t seen anything quite like it.”

As expected, there has also been a big boost to lease rates and infill-site prices in the GTA, North America’s third-largest industrial-space market. The average asking industrial net rent in Toronto in the latest quarter, $6.34 a square foot, is up 39 per cent since 2014 according to data from Colliers.

As for redevelopment sites, there seems to be a consensus that the days of bargain deals are over. People who live and breathe industrial real estate are still talking about Bentall Kennedy’s acquisition in August of the Samuel Steel plant in southeast Mississauga: It went for a record $2.1-million an acre, though nobody’s saying anyone overpaid.

David Owen, Pure Industrial Real Estate Trust’s (PIRET) vice-president for asset management, sees that Samuel deal as evidence that PIRET’s timing was perfect when it won the bidding for an old DuPont Canada plant in Scarborough last fall (he says he can’t yet disclose the price).

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The DuPont deal, brokered by Avison Young’s Mr. Sykes, started out with eight potential suitors for what was a 150,000-square-foot teardown (demolition began in the summer and the hope is that the new, nearly 300,000-square-foot Venture East facility will be open in the second quarter of 2019).

“We had a chance to economically purchase a great infill site, near Highway 401, the 404 and 407, and with great access to the city core,” Mr. Owen says. “We’d seen the longer-term trends: Scarborough historically has had much older product, very little Class A, but the Class A that’s there has done extremely well.”

Mr. Owen says a big part of that success is that Scarborough and Etobicoke have much better access to labour than facilities farther out in car-dependent areas.

Mr. Garrigan echoes that point, adding that some who apply for the “pick-and-pack” jobs (which are often seasonal and temporary) rely on public transit. “In Scarborough and Etobicoke, people can get to work on the bus and retail tenants have picked up on this.”

As for the last-mile factor, Mr. Garrigan sees some retailers, in order to cut down on transportation costs, opting for a couple of smaller spaces instead of a single huge one.

He also says that, “for some of the smaller pick-and-pack setups, you don’t necessarily need high ceilings and big truck facilities [giving new life to old buildings]. There are places in the U.S. where you’ll have smaller trucks unloading out back while Uber or Lyft-type drivers line up out front to get five or 10 parcels for distribution.”

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All three make the point that getting the last mile right in e-commerce has become a top priority as transportation is probably the last area where big cost efficiencies are still available, either to cut overhead or pass savings on to consumers.

As for online retail’s effect on inner-suburban industrial space, Mr. Owen says “it’s early innings ... in Canada, we’re at about 5-per-cent e-commerce penetration; in the U.S., it’s about double that or more.”

As Mr. Sykes says: “It really is exciting. Vancouver may be the only market that’s hotter than the GTA, but that’s more due to land constraint. ... In Toronto it’s because of demand and activity.”

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