Canadian Industrial Real Estate Blog

The development of new industrial buildings on what is known as greenfield land (land that has never had any type of structure erected on it) is relatively straight forward to the extent that provided services and the proper zoning are in place and environmental studies and regulations are dealt with in a manner that is satisfactory to the governing bodies, one is free to construct a building provided that it is built to code and conforms to coverage allowances (the amount of allowable building area on a particular piece of land). 

As the demand for developable land continues to out-pace supply across Canada’s major centres including Vancouver, Calgary, Edmonton, Toronto and Montreal, naturally causing increases in pricing, end-users and developers alike are forced to ask themselves the questions that ultimately lead to creative solutions. These questions are often found in the form of; “How am I going to get control/ownership of developable land at a reasonable price, located within the hubs of activity (namely airports and major cities), satisfy zoning requirements so that I can develop my required warehouse building in a time frame that is not too prohibitive based on the double digit return I expect on my capital”. The answer to what is clearly a complex question is more and more often found in the redevelopment of existing buildings located in urban centres throughout the country.

The redevelopment of existing industrial buildings and/or land sites upon which an industrial building once sat vs. Greenfield development is another undertaking entirely. A multitude of considerations and challenges are required to be examined and solved prior to engaging on redevelopment of these types of properties. Consider the following as examples: 

The City’s Vision For Land 

There is tremendous pressure on local Government within the major cities to rezone former employment lands (land that has been used to house commerce by way of retail, commercial or industrial) to residential in order to accommodate the ever-growing demand for housing within these urban areas. While cities do their best to maintain a palatable balance between the two for reasons varying from people needing a place to work that is within reasonable travel distance utilizing public transit, thereby eliminating the need for automobile reliance, to ensuring that the higher tax base payable by commercial uses and needed to fund infrastructure to keep the city viable, the residential argument often wins. The challenge then for developers and end users begins with actually finding a piece of land and/or building where they can maintain an industrial zoning in order to build.

Raising the Roof – The Clear Height Dilemma  

There are two main ways to redevelop existing land including knocking the existing structures down and starting from scratch and modifying a building to accommodate alternative needs. When redeveloping using the latter approach, we must remain cognizant that many of the urban industrial buildings were constructed to accommodate the true industrial era when manufacturing was king in North America and the generally accepted specifications of an industrial building were vastly different than today’s requirements. One of the most obvious and critical adjustments to these specifications has been the height of a buildings ceiling, otherwise known as the clear height. With manufacturing having experienced a major shift to other hemispheres on the globe, North America has truly become the land of distribution. The distribution/supply chain/logistics model then, relative to industrial buildings, requires the ability to stack product on pallets and in turn racks, as high as 30’ in most cases. Most of the industrial buildings of the industrial era had clear heights varying from 12’ to 18’ high. The question then is, what to do with a roof that is too low. “Raise It” you say…good answer. Although technology does exist throughout North America, the practicality has not yet become commonly acceptable in Canada. This is due to change in the coming years.

Environmental Clean-Up

Industrial buildings that have housed manufacturing concerns in the past often operated with environmental regulations that are not as stringent as today’s standards and while in most cases unintentional, these manufacturing processes often experienced spills and/or leakage of materials used in various processes and in many cases, partial rupturing of underground storage tanks. When these materials are mixed with moving ground water, the results have caused leaching throughout their site and those of neighbors.  Another challenge then for those seeking to acquire redevelopment properties is dealing with the results of environmentally hazardous soil that is discovered upon normal testing when properties are changing the hands of ownership. There are some terrific specialty firms that deal with these issues as part of their core-competency and developers and end users rely heavily on their skills and expertise to overcome these challenges.  

The trend towards redevelopment of urban industrially zoned properties to warehouse uses is here to stay and creates exciting possibilities for those contemplating this route as a solution for stated corporate objectives. With the correct guidance from those with experience navigating these waters, the process is enjoyable and is a great alternative.   

Pearson International Airport wants to lease prime land to developers to reduce landing fees, which are among the highest in the world. The Greater Toronto Airports Authority, operator of Pearson, is expected to announce today that a 6-hectare site across from Terminal 3 on the east side of Airport Rd. is available for an estimated $300 million development. The site, now a parking lot, could hold a 400-room hotel, conference centre, retail shops and two office buildings. Check out a full article about this recently written in the Globe & Mail newspaper by clicking here.

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.

The Basics - Brownfield properties are simply a parcel of land that has been environmentally contaminated by either an occupant on the land or a neighboring occupant whose contamination has managed to leach onto the parcel of land, often through ground water movement. This is the ugly family member who nobody wants to hear from or speak about.

Brownfield’s are typically created due to manufacturing facilities that were operable on or close to the land and at some point, a leak or spill from processing whatever widget has entered the soil. Many times the culprit can be an underground tank that was used to store some sort of liquid and the integrity of these tanks becomes compromised. Presto, that parcel of land qualifies as a Brownfield site.  

The Challenge - What to do with the ugly family member? There was a great line in the movie about a horse named Seabiscuit. At a point in the movie, the star happens upon a washed-up trainer with a horse that falls into the same category. The eventual line came from the trainer who references his equally downtrodden horse. “You don’t throw away a life just because it is a little banged up!” There are select group of developers/investors throughout North America (very few of which reside in Canada) who have the capabilities (experience, environmental intelligence, understanding of the Ministry of Environment and their processes, guts, etc.) to confidently understand the specific challenges associated with a given Brownfield site (each is a different story) and follow through with a purchase of the property and an eventual remediation plan.  

Brownfield Trend Comments – As cities become larger in scope and Greenfield Development continues to be pushed further away from them, simply due to the land supply or lack thereof, the feasibility of redeveloping properties that are located in or much closer to city cores, becomes more compelling. As a result, there has been a tremendous trend towards taking the risk, spending often large amounts of money and dedicating considerable time towards the remediation of Brownfield sites so that they may enjoy a higher and better use that typically maximizes the value of the property itself. Given the rapidly changing and increasingly competitive global economic environment, many manufacturing concerns have closed all or part of their operations in favor of less expensive manufacturing options in other parts of the World including China, India and Mexico. This of course causes the vacating of buildings that become some of the fuel for the redevelopment trend.

Brantford, ON, located West of the GTA, has been a bustling hot-bed of industrial development activity for the past 2 - 3 years. This development has focused predominantly around logistics & distribution uses vs. manufacturing. This trend continues with the announcement from Sonoco that they are closing a local plant. The market continues to adjust and investors along with end users appeear to successfully be adjusting accordingly.

Throughtout the GTA, we continue to see older industrial facilities being redeveloped. Although the City of Toronto is placing bigger efforts than ever to maintain existing designated employment lands for just that..employment, there has been a dramatic number of brownfield sites that are beng redeveloped as residential. Many traditional developers swear that the "Big Money" is in redevelopment properties that cater to residential intensification. Check out an article written by a real estate reporter named Theresa Boyle of the Toronto Star.