A small bay building, like the one above in Langley, B.C., provides space for several tenants under one roof.Frontline Real Estate Services
Vacancy and lease rates are often reported as though all industrial buildings are the same, but there is a wide range of assets in the sector, from mammoth one-tenant warehouses to small bay buildings with multiple tenants.
Investment opportunities and preferences vary according to asset size and market, industry professionals say, as do prospects for growth and availability. Single-tenant, large bay warehouses with 500,000 square feet attract a different type of investor than a small bay, 50,000-square-foot building with multiple tenants.
David Owen, president of Toronto-based real estate agency Pure Industrial, says a lot of the new industrial construction in the Greater Toronto Area has been large bay, one-tenant warehouse and distribution buildings built outside the city core.
The company, which acquires, develops, leases and manages industrial real estate across Canada, owns infill industrial property in a variety of sizes.
“Developers are not adding new small bay buildings in the same quantities as you see the large bay being delivered,” Mr. Owen says.
Pension funds and other institutional buyers tend to prefer large, stabilized assets, he says.
Real estate firm JLL reported fourth-quarter industrial vacancy in Toronto at 2.4 per cent, a slight increase from the historically tight markets of the past couple of years. Average industrial lease rates are running at $18.61 a square foot, according to the report.
Although supply and demand for vacancy is beginning to balance out, Mr. Owen says, long-term, vacancy-rate averages still remain low or well below, especially for infill assets.
Some people like the single-tenant building because of the ease of management, but others like the four- or five-tenant building because the risk is spread out.
— Marshall Toner, executive vice-president, JLL in Calgary
“Land constraints have created development constraints which have created supply constraints overall,” he says.
Mr. Owen doesn’t expect lease rates to soften. Buildings coming online in early 2024 have been in the works since 2020 or 2021, but supply coming on in late 2024 and beyond has higher costs to factor into leases.
“Toronto land price [increases] are even steeper than the rental rate curve,” he says. “We’ve had all this inflation of construction costs. I find it difficult to believe the rental rates will stagnate, given the required return for a lot of these developers. That’s specific to that large bay environment.”
Smaller bay buildings have a different profile.
“To build new small bay is extremely expensive,” Mr. Owen says. “We haven’t seen a lot of new supply added for small bay or mid bay overall.”
But small-bay buildings, which provide space for several tenants under one roof, attract private investors looking for more diverse renters.
“You’re not relying on a single tenant. It’s a little bit more management-intensive from the landlord’s perspective,” Mr. Owen says. “You have leases expire at different times, so you’re not getting one big lease at a time.”
In Toronto multibay industrial assets are typically in older, more established industrial nodes, providing superior transportation and infrastructure required by companies that need workers in the building and close access to customers.
Mr. Owen says while brokerage firms don’t break out subclasses of industrial buildings in their market reports, Pure Industrial’s experience is that the small to medium bay assets are outperforming the large-bay properties, in part because one deal in the large bay category significantly swings the space availability rate.
“If you’re a smaller investor, you want that diversification, especially if you’re borrowing from a bank,” Mr. Owen says.
Larger industrial buildings like the Lakeridge Logistics Centre in Ajax, Ont., set to be completed this year, are typically leased to one tenant.Pure Industrial
Vancouver’s supply side is even more constrained, given its location between mountains and sea.
According to CBRE’s Q3 report, there was an industrial vacancy rate of 2.4 per cent in the Metro Vancouver area.
Chris MacCauley, executive vice-president at CBRE’s Vancouver office, cites a vacancy drop of 20 basis points from Q3 to Q4.
“We have a limited land supply and a regulatory boundary around our lands,” he says. “That’s why it makes it more attractive for investors. It’s also why it makes us more expensive than any other market.”
Lease rates are over $20 a square foot, according to market reports, but Mr. MacCauley says the 20- to 30-per-cent increases a year seen during the pandemic are over.
“We used to be three or four times [higher than] Toronto or Calgary. Now we’re on par with parts of the Toronto market and double the Calgary market.”
Mr. MacCauley says private owners dominate the Vancouver market.
“Institutions want to be here. They will tell you they are underweight in Vancouver industrial and they’re willing to pay a bit because they understand the barriers to Vancouver are very hard,” Mr. MacCauley says.
In secondary markets, such as the Fraser Valley and tertiary markets like Vancouver Island or the interior, mid- and small-bay assets offer a chance for mid-level investors to gain access to the industrial market, he says.
International buyers from the U.S., Europe and Asia are starting to show interest in large-scale Vancouver assets, he adds.
“They want hundreds of thousands of square feet or a million-plus. These types of funds look at new builds or large portfolios,” he says.
In Calgary, where land is ample, construction is active near the airport and north of the city in the Balzac area. Supply has been creeping up, with three or four new projects delivering large-scale space, says Marshall Toner, executive vice-president at JLL in Calgary.
JLL’s fourth-quarter 2023 report shows vacancy at 3.1 per cent with the average rent at $10.67 a square foot. Most new buildings are large-scale assets and the inventory for small to medium bay is tight, it says.
“The spotlight has been shining on large-bay distribution buildings,” Mr. Toner says. “But there is the segment in that 25,000- to 50,000-square-foot range that’s also been a successful sweet spot.”
He says there is a mix of institutional and regional buyers buying Calgary industrial, including the mid-bay-size assets.
“Sometimes it comes down to the investment criteria of the buyer,” Mr. Toner explains. “Some people like the single-tenant building because of the ease of management, but others like the four- or five-tenant building because the risk is spread out. When one tenant leaves in a 500,000-square-foot building you’ve got more urgency to deal with it.”
Mr. Toner adds that only transactions under $5-million have been affected by rising interest rates.
“Over that, it’s business as usual,” he says. “We haven’t had any turbulence or rough air with people trying to get their financing together for properties over $5-million.”