The Canadian real estate that smart money is still desperate to buy: industrial warehouses – The Globe and Mail
Unrelenting demand for Canada’s storage and distribution warehouses is vaulting that segment of the real estate market into a new echelon, with industrial properties in and around cities such as Toronto and Montreal commanding some of the fastest-rising prices in the world.
The market for warehouse space is so strong that the national vacancy rate has fallen to a record low of 1.6 per cent, according to commercial real estate services and investment firm CBRE Group Inc. Supply is so tight that some landlords have been able to raise rents more than 100 per cent in tenant turnovers and lease renewals.
The returns have attracted some of the world’s most sophisticated real estate players. In June, Prologis Inc. PLD-N, a massive industrial property owner based in San Francisco, bought land in the Greater Toronto Area to develop a new warehouse. The $500-million purchase price amounted to almost $2.5-million per acre, more than double the going rate five years ago.
Yet there are fears this can’t last much longer. Major retailers have cautioned that the e-commerce boom has reached its limit, and this spring Amazon spooked investors by announcing plans to sublease some of its warehouse space. At the same time, interest rates have spiked, making commercial mortgages more expensive, and incessant inflation has sent development costs soaring.
So far, though, industrial properties here have defied fears of a sector-wide cooling, and the markets in four Canadian cities are the tightest in North America. “The party is not over,” said CBRE Canada vice-chair Paul Morassutti. “It might not be quite the rager it was, but it’s definitely not over.”
In mid-August, Summit Industrial Income REIT, which exclusively owns Canadian warehouses, reported quarterly earnings and disclosed that its average rent increase this year when a lease was renewed or in a tenant turnover was 46 per cent.
Summit also reported that the national average rental rate across the sector rose to a record high of $12.25 per square foot. Five years ago, it was less than $7.
Demand for warehouses took off around 2016 as e-commerce gathered steam, then shot up through the pandemic as consumers relied heavily on online shopping. Although e-commerce growth has slowed of late because lockdown restrictions have lifted, online sales are still rising overall, just at a slower rate.
CBRE estimates that for every billion dollars in e-commerce sales in Canada, approximately 1.25 million square feet of warehouse inventory are needed. That means another 90 million square feet of space could be needed in the next five years. Canada currently has 1.9 billion square feet of industrial space.
The need could be even greater if just-in-time inventory systems become more prevalent, with companies increasingly turning to onshore sourcing in order to mitigate the supply chain issues that have plagued them over the past 2½ years.
High transportation costs have also boosted industrial property values, something Mr. Morassutti said is underappreciated. Typically, logistics and transport expenses account for 70 per cent of supply chain outlays, while real estate is only 5 per cent of the burden. That means that for every dollar saved on logistics – by having warehouses closer to the customer, for instance – a company can theoretically pay 14 times more on rent.
This month, Summit disclosed that it recently re-leased a one-storey warehouse in Markham, Ont., northeast of Toronto, after only one month of downtime and increased the monthly rent by 42 per cent. At another property in the GTA, the REIT re-leased the space with no downtime – and a 117-per-cent rent increase.
Summit’s shares, which trade on the Toronto Stock Exchange, have soared 223 per cent, including distributions, over the past five years. Rivals Granite REIT and Dream Industrial REIT, which own a mix of Canadian and international properties, have gained 98 per cent and 86 per cent, respectively. The equivalent return for the S&P/TSX Composite Index is 57 per cent.
Because residential real estate has cooled so quickly in Canada over the past six months, and commercial sectors such as office properties have also struggled, there are fears warehouses will get hit, too. The main concern is that, with the pace of construction at a record high, the market will eventually get flooded with industrial properties.
However, even after all the properties currently under construction are completed, the total amount of square footage available will increase just 2.3 per cent, according to CBRE.
As for fears that Amazon is scaling back in the U.S., which sent a chill through the entire sector, that just hasn’t materialized. “What’s interesting is we’ve been monitoring the market pretty closely to see what Amazon is doing,” Granite REIT chief executive Kevan Gorrie said on a conference call with analysts and investors this month, “and there are so far almost zero, it’s negligible, the number of assets that Amazon is actually looking to sublease.”
Because the industrial market has been so hot, it is widely believed there will be some softening, particularly in other countries. “There are some U.S. markets that don’t have many constraints on land or constraints on development, and those markets are finding rents stabilizing much quicker,” Dream Industrial CEO Brian Pauls told analysts and investors on the company’s quarterly conference call.
“But in the GTA, certainly, and in Montreal, what we’re seeing are rents continuing to grow,” he said.
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European real estate stocks hammered by banking turmoil – Financial Times
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A massive chunk of Toronto's Kensington Market is now for sale at $24 million – blogTO
A large portion of Toronto’s eclectic Kensington Market community is on the chopping block, with a group of properties hitting the market for a combined $24 million, and potential plans to redevelop the site with a new mid-rise building.
Realtors are shopping a group of seven properties around that includes 23 Saint Andrew Street plus 25 through 35 Kensington Avenue, located just northwest of the Dundas and Spadina intersection.
The document circulating mentions the possibility of purchasing additional properties at 21 and 23 Kensington Ave plus an easement lot attached to 23 St. Andrew, which would add 0.173 acres to the site and increase the developable footprint to 0.66 acres.
The site is currently home to a collection of Victorian semi-detached homes with commercial frontages and includes a handful of businesses such as vintage store Fashion Old and New.
If sold off, it is expected that the new owner of the properties would redevelop the site with a higher-density development, and the document specifically notes the potential for an eight-storey building on the land.
Toronto’s Official Plan does indeed designate this pocket of the city for mixed-use development, though, like pretty much everything else proposed under the city’s archaic zoning by-laws, any mid-rise plan would require a rezoning to move forward.
The site is located within the planned Kensington Market Heritage Conservation District (HCD), which aims to conserve the area’s cultural and built heritage. This would likely only prove a small speed bump in any redevelopment plans, as new development is still permitted in an HCD as long as it adheres to the surrounding style.
Federal Government Amends the Foreign Buyers Ban Regulations – British Columbia Real Estate Association
On March 27, 2023, the federal government announced amendments to the Prohibition on the Purchase of Residential Property by Non-Canadians Act’s (the Act) accompanying Regulations, effective March 27, 2023. The Act was passed in June 2022 and the regulations came into force January 1, 2023.
Here’s what you need to know about the amendments to the Foreign Buyers Ban.
Enable more work permit holders to purchase a home to live in while working in Canada.
The amendments allow those who hold a work permit or are authorized to work in Canada under the Immigration and Refugee Protection Regulations to purchase residential property. Work permit holders are eligible if they have 183 days or more of validity remaining on their work permit or work authorization at time of purchase and they have not purchased more than one residential property. The current provisions on tax filings and previous work experience in Canada are being repealed.
Repealing existing provision so the prohibition doesn’t apply to vacant land.
Repealing section 3(2) of the regulations, so the prohibition does not apply to all lands zoned for residential and mixed use. Vacant land zoned for residential and mixed use can now be purchased by non-Canadians and used for any purpose by the purchaser, including residential development.
Exception for development purposes.
This exception allows non-Canadians to purchase residential property for the purpose of development. The amendments also extend the exception currently applicable to publicly traded corporations under the Act, to publicly traded entities formed under the laws of Canada or a province, and controlled by a non-Canadian.
Increasing the corporation foreign control threshold from 3 per cent to 10 per cent.
For the purposes of the Prohibition, with regards to privately held corporations or privately held entities formed under the laws of Canada or a province and controlled by a non-Canadian, the control threshold has increased from 3 per cent to 10 per cent. This aligns with the Underused Housing Tax Act’s definition of ‘specified Canadian Corporation’.
While the BC Real Estate Association (BCREA) welcomes these amendments because they provide greater flexibility to newcomers and businesses seeking to contribute to Canada, we remain opposed to the legislation’s highly political and largely non-evidential assertion that foreign ownership plays a significant role in Canadian housing attainability.
The federal government’s need to amend this policy demonstrates its overly hasty policy-making process. The negative unintended consequences that necessitated the amendments could have been mitigated with proactive, fulsome sectoral consultation. The negative fallout from this legislation once again highlights a concerning trend at all levels of government to implement policy affecting major economic sectors without adequate advance sectoral consultation.
BCREA is committed to continuing our advocacy efforts calling for the establishment of a Permanent Housing Roundtable to bring together all stakeholders in the housing sphere and help address its challenges with an inclusive, holistic and innovative approach.
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