Canadian Industrial Real Estate Blog

Sam Zell is considered one of the best real estate entrepreneurs in the World. His early years in real-estate investment could be traced back to, while an undergraduate, purchasing apartments in Ann Arbor, Michigan. He went on to create the Equity Group Investments, which spawned three public real estate companies, including: Equity Residential, the largest apartment owner in the United States, Equity Office Properties the largest office owner in the country, and Manufactured Home Communities, a mobile home company. I recently received a link to a humerous, insightful and very awakening message by Sam. To hear Sam's message, click here, turn on your computer volume and have a listen.

As with consumers in general, end users requiring space within industrial buildings often seize the opportunity to participate in a flight to quality, otherwise known as “Movin’ On Up”. Many of the industrial buildings that have been utilized in past decades were constructed to standards and specifications that are not conducive to the demands and use types that are commonly seen in the market today. When tenants leave these older buildings in favour of newer and better-designed facilities, the buildings they leave are naturally placed into the overall pool of buildings that are considered part of vacancy for that period of time. Two things to consider in these situations are:

1. Even though space is being absorbed in a newer building, that end user has left space behind which may very well be vacant. As such, one could consider that there was an absorption that occurred throughout the relocation. The facts are that unless the end user took space that was larger than the space they left, there was no true net absorbtion as they were simply trading facilities.  
2. One of the rogue factors that has increasingly had an impact on the vacancy rates throughout the City of Toronto proper, is the conversion of what was once industrial or commercial space (known as employment lands), to another use entirely. One of the hottest topics and activities for developers throughout the last 3 – 4 years has been residential intensification and/or the redevelopment of industrial properties to a residential use or zoning. When an industrial building is redeveloped to a use that no longer houses employees, it is theoretically removed from the overall inventory of space.

It is clear to see that the real estate market depends on net overall growth of space required in order to maintain a healthy supply and demand balance.

There is an increasingly amount of end users who are now finding opportunities to locate to what was generally accepted in the past as outlying areas from the GTA. These locales include Brantford, Woodstock, Barrie, Guelph, Kitchener/Waterloo and London, Ontario. This flight to areas that are more accessible to many in the workforce should not have a significant impact on overall vacancies of the measurable areas in the immediate GTA. Developers are already monitoring the progress of new development throughout a much larger geographical area when considering the delivery/development of new buildings.

The Greater Toronto Area (GTA) boasts the fourth largest industrial space inventory in North America at approximately 675,000,000 square feet, we notice that there has generally been steady demand from the end user community throughout 2006 however this demand has been slightly outpaced by new supply. There was a tremendous push of development throughout 2004, 2005 and the beginning of 2006. This development is now slowing which will naturally result in demand beginning to surpass supply which will conversely decrease the options available for end users to choose from, leading us into a period of increasing rental rates throughout 2007. 

Otherwise known as supply and demand, vacancy and absorption rates provide a clear insight into the state of a given industrial real estate market. Here is what they mean:

Vacancy Rates - Typically expressed as a percentage of the overall inventory (the amount of industrial space existing in a given geographical area), vacancy rates indicate approximately how much space is available for lease, sublease and/or sale. The higher the rate, the more space is available for end users to choose from. The more vacancy or choice that is available causes a more robust environment for the end user to leverage their needs relative to the negotiation of terms.

Absorption Rates – This is and indicator of how much space has been committed to be occupied r “absorbed” for the pool of vacant space.

As with all supply and demand environments, those that supply the product, in this case developers, try their best to keep a healthy balance between the two at all times (easier said than done). Typical causes for supply to be over weighted are downturns in the local and global economies and weakened consumer spending confidence and/or inflamed competition by overzealous small or large-scale developers.

Based in the US, First Industrial Realty Trust announced that it has completed a 977,000 square foot sale-leaseback transaction with Volkswagen of America and Volkswagen of Canada. The transaction involved 3 distribution centres located in Dallas, Texas, Chicago/Milwakee and the GTA that were leased back to Volkswagen for 15 years. The Canadian asset totaled 348,384 square feet and has reportedly sold for $27,552,691 or $79 per square foot.

There was an article written by Elizabeth Church of The Globe and Mail that speaks to the future of the commercial real estate investment market. The heads of Riocan, GWL, Morguard and the Caisse have all weighed in. Investors large and small are wise to note their thoughts.