A proposed 15-per-cent hike in development charges in the Greater Toronto Area may tip the scales for industrial developers and cause them to look elsewhere, CBRE Ltd. argues in a new report to be released this week.
The proposal is one of the options that Metrolinx has floated to pay for a massive upgrade of the region's transit system. The transit overhaul, dubbed "The Big Move," is dependent on about $2-billion of funding a year. Metrolinx's suggestions for raising the money include a one-percentage-point increase in the Harmonized Sales Tax, a five cent per litre regional fuel and gasoline tax, a business parking levy, and higher development charges.
The commercial real estate industry has already come out swinging against the proposed parking tax, which would be charged for parking spots that are not residential or on streets. The industry has argued that such a tax is regressive, will not change drivers' behaviour, will negatively impact economic development in the region, and will not raise as much money as expected. Metrolinx had estimated that the parking tax could raise $350-million a year.
Now a new report from CBRE argues that an increase in development charges, coming at a time when municipalities have already been raising such charges, could be detrimental to the industrial real estate market.
"A significant hike in development charges will require pro formas to be reassessed and has the potential to not only shift development within the GTA, but provide markets outside the region with a competitive edge," says Andrew Wright, executive managing director for CBRE Ltd.
Development charges are fees that developers pay to municipalities to help fund services such as sidewalks, roads and sewers. In 2011, $1.3-billion in development charges were collected across the province, two-thirds of which was paid in the Greater Toronto and Hamilton area, according to Metrolinx.
Metrolinx estimates that an average 15-per-cent increase in fees could generate about $100-million per year in new revenue to help pay for transit.
The Greater Toronto Area is the third-largest industrial market in North America, and factories and other industrial properties are major contributors to employment and the economy, CBRE says in its report.
New industrial buildings in the area are, on average, 241,388 square feet. To build a building that size in Richmond Hill, where development fees are at the high end, a developer would now have to pay $4.7-million in charges. The development fees would rise to $6.6-million if the 15-per-cent increase goes through, CBRE says.
The highest industrial development charges currently exist in York Region, where they range from $20.96 per square foot in Markham to $23.89 per square foot in Richmond Hill. The fees in the Halton Region are the next highest, followed by Peel. "The City of Toronto, due to the fully built nature of its industrial areas, does not apply municipal or regional DCs on industrial construction, leaving only the educational levy of $0.58 psf," CBRE notes.
The brokerage is forecasting "a wave of new industrial construction" by developers seeking to beat future fee increases. "Unlike office construction, industrial development can be scaled up or down very quickly as project timelines are shorter," it says.
"Currently, 80 per cent of construction activity is located in the western portion of the GTA, primarily in Halton and Peel Region, with the remainder located in York Region," the report says. "The western portion of the GTA will continue to attract industrial development due to its access to the 400-series highway network, rail lines, as well as the proximity to Toronto Pearson International Airport, Canada's busiest airport."
Every municipality in the GTA has a bylaw that allows developers to expand the industrial gross floor area for an existing building by up to 50 per cent without paying development charges, the report notes.
That gives developers an avenue to add additional space while bypassing the charges. "For example, much of Orlando Corporation's new industrial space in Brampton has the potential for future expansion without significant DCs," the report says. "Other notable developers such as HOOPP and First Gulf Corporation are taking this into consideration as they plan for the future of their industrial portfolio."
"Once higher rates come into force, there is no doubt that developers will attempt to maximize existing properties prior to seeking new development opportunities," CBRE says. "Once existing properties have been built out, developers would likely pursue opportunities in municipalities with lower development charges."