New Canadian dream? Industrial growth over home ownership

The Canadian dream will no longer be achieved by home ownership, but through sustainable industrial growth that will create unimaginable business opportunities for generations to come.

So say Rosefellow co-founders Mike Jager and Sam Tsoumas, who unveiled their manifesto on the future of industrial real estate in a presentation at the Montreal Real Estate Forum June 13 at the city’s convention centre.

Jager said if they’re even partially right, “the next 20 years will be a very, very exciting time for industrial real estate.” By contrast, homeownership, once the cornerstone of the Canadian dream, is now out of reach for many Canadians under age 40.

The Rosefellow co-founders said the growth in industrial will come from the return of Canada’s manufacturing sector.

Canada has been outsourcing its manufacturing and supply chain for half a century, with huge payoffs for owners and investors despite the hassles of importing and shipping.

However, “everything has changed,” Tsoumas said. “COVID has reminded us not to put all our eggs in the same basket and we have to invest in the rebuilding of the supply chain.”

Bringing manufacturing back home

Jager said while it took more than 50 years to almost completely offshore Canada’s manufacturing supply chain, “we believe it will take less than half that time to bring Canadian manufacturing back home.”

With AI and robotics, manufacturing can be location agnostic, he said, and the cost of labour will not affect where things are made.

Tsoumas predicted industrial real estate developers will see a constant demand for their properties and investors in the asset class will obtain “exceptional” returns.

“We believe this will be true country-wide. However, those that invest in the Greater Montreal area will do even better,” because property values in the city remain lower than other major markets, with demand just as high.

Meanwhile, demand for fulfillment centre development will continue unabated.

“Consumers have come to expect their things to be delivered quickly and to their door,” Tsoumas said.

“E-commerce has gone from a luxury to a way of life. This is only putting pressure on businesses to invest in their distribution and last-mile solutions.”

In addition, construction costs have risen so much that most real estate projects are not financially viable, except for industrial developments, which still make financial sense.

“To meet this demand, we know that last-mile logistics and fulfillment will be crucial for our future as Canadians,” Tsoumas said.

“The demand for large-plate, highway-adjacent, well-located warehouse and fulfillment centres will only continue to grow.”

Montreal’s industrial situation has changed

In a session on industrial real estate that followed the Rosefellow presentation, William Jegher, a partner at EY, said for a long time you couldn’t give industrial land away in Montreal, but that situation has changed dramatically.

“With our municipal taxes layered on top of the net rent, we’re now in a situation where oftentimes we’re not competitive any more with the GTA, which is actually mind-boggling.”

Tsoumas, who also participated in the session, noted a new development in Montreal with rents at $17 or $18 a foot net, can easily see additional taxes of $6 to $11 per square foot. By comparison, in a GTA municipality such as Mississauga, rental rates are around $21, but taxes are only $3 to $4.50.

“I don’t think we’ve seen the worst of it,” Tsoumas said, noting “people are going to be in for a shock.” To deal with the high taxes, land values will have to decline, mill rates will have to be lowered or tax abatements will be required.

Noémie Lefebvre, a director at Altus Group, noted while rents in Montreal have increased by 75 per cent since 2020, net average industrial rates in the city are much lower than those for other major centres.

Net average industrial rents in Montreal were at $12.60 in Q1, compared with $20.10 in Vancouver and $18.20 in Toronto.

That can be explained by Montreal’s large number of older, low-height buildings for which there is weak demand.

Tenants facing unique challenges

Echoing his previous comments, Tsoumas said he is starting to see more manufacturing tenants entering the market, which require a much more power than distribution centres.

However, it is becoming challenging to get that power from Hydro Quebec in a timely fashion.

In addition, greater heights and buildings with larger bay sizes are becoming the norm.

“Clients are getting a little more specific in their demands (and) 32-foot clearance is starting to become low on the spectrum for new builds,” Vincent Iadeluca, senior vice-president in the industrial division at Colliers International, said.

Cities are also becoming more demanding and are increasingly making grandiose demands for major industrial projects, Tsoumas said.

For example, for a large-scale industrial project, one city suggested townhomes, a day-care centre or a hockey rink be put on top of an industrial building.

Still, developing industrial in the Montreal area remains much easier and faster than it is in Ontario.

In the Montreal area, it is realistic for construction to begin 12 months or sooner after acquisition, whereas in Ontario, “it’s a painful and long process” that can take 24 months, Tsoumas said.

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