One of these days, I'd like to hold a little competition where I ask anyone to bring me an option for a newly built, never-occupied freestanding industrial building in the GTA within the range of 30,000 to 60,000 sq ft that is currently being offered for sale. They won't be able to, because they don't exist. In fact, even if I had asked that same group to show me any building of this sort being built at the moment, not even for sale, but just being built by a group that wants to occupy it, they'd be hard pressed to come up with options.
Welcome to the unicorn of the GTA's industrial real estate market - the 30,000-60,000 sq ft freestanding industrial building. Don't get me wrong, they exist. They're just not building any new ones, and those that exist rarely become available for sale. This means that for those businesses that are looking to purchase or lease such a building, the options are quite limited (especially for sale though). And if you're looking to purchase one with 24ft+ clear height, minimal office, and great shipping space, good luck. Inventory for that type of product in the GTA can probably be counted on one hand.
In fact let's do the exercise. If we search for buildings on the market at the time of this writing with the following specs:
Within the GTA
Freestanding
30,000-60,000 sq ft
24+ clear height
Good shipping apron with room for 53 ft trailers
Less than 20% office space
There are a grand total of 2 options that meet that criteria. If we lower our clear height minimum to 20 ft, there are 8 properties that meet our criteria. And if we lower our clear height minimum to 18 ft, there are 17 properties that meet the criteria.
This means that even if we lower our standards to 18 ft clear height, a height that is no longer seen in new developments, we still only have 17 options in the entire GTA. Don't get me wrong, 18 ft is still a very functional clear height and still works for the majority of businesses, but most of my clients who are looking to spend millions of dollars on a building that they will hold for years to come are hoping to have at least 20 ft and ideally quite a bit higher. That leaves literally only a handful or so options.
And if we narrowed the criteria down further, as most businesses would realistically do in order to meet their specific requirements - let's say reduce our size range to 30,000-40,000 sq ft? Well then we end up with 1, 3, and 7 options for 18+ ft, 20+ ft and 24+ ft clear heights respectively. Narrow the criteria further because a company wants to be in a specific area of the GTA such as Mississauga? (remember, we're currently looking at ALL GTA). Well you can see where this is going. There's no product.
Why Is There Nothing New Being Built?
There are several factors as to why we're no longer seeing new developments of freestanding small to mid size industrial buildings in the GTA, and we'll break those down below.
The numbers don't make sense. When you break down the cost of land, development charges, and construction for an industrial property these days, it's very difficult to make any money unless you're really doing it at scale. This is the reason that most new industrial development projects today are for very large (in excess of 100,000 sq ft and often in excess of 1,000,000 sq ft), multi-unit buildings. Also, the developers who are carrying out these projects (generally large institutional developers and REITs) are banking on long-term steady returns and hence they are holding onto these properties and leasing them rather than selling them. One of the few developers who does develop and sell the units is Beedie, but again their projects are industrial condo units that range anywhere from 8,000 to 20,000 sq ft for a single unit and never freestanding.
There is no land. You may ask why occupying businesses themselves don't just build themselves a building if they're so hard to find. The issue is that even if the numbers made sense, there is not a lot of remaining small parcel industrial land available within the core GTA (i.e. in the 1-3 acre size range that would be suitable for such a building). Some of the fringe GTA markets such as Bradford, Milton, and Durham Region have some of these parcels available (though not much). At the end of the day though even if the land is available, when you tally up the cost of buying the land and building the project, you're looking at not much of a difference from buying one of the few existing buildings that are available for sale. That's not even mentioning the lead-time required for approvals and construction (years), and the headaches with having to deal with a construction project for a business that is not in the business of developing buildings.
What Does This Means for Occupiers?
People don't believe me when I say this, but demand for industrial properties in the GTA has been increasing for several years now and is expected to keep increasing going forward. There are several factors at play for this, not the least of which is e-commerce, immigration, and re-shoring/on-shoring. On the supply side, as touched upon already, there is very little new product in the small and medium sizes being built, and even less so that is freestanding. Zoning policy is a factor as well, as many municipalities are scrambling to re-zone for high density residential in order to help with a housing crisis, and this often means zoning away from employment or industrial uses. There certainly are not many municipalities out there that are prioritizing adding more industrial-zoned land within their borders, nor are their residents asking for it.
So you can see where this is going. Demand is rising, supply is being constrained further across the board, and the supply taps have been shut off completely for a specific subset of the product, i.e the small to mid sized freestanding building. What does that mean for occupiers going forward? Well it probably means things only get uglier.
No Distress
Lastly, I want to point out that there is very little distress in the industrial market. By that I mean that most owners of properties in this asset class are in very good financial shape, most having bought their buildings many years ago at very low prices (relative to today) and with little debt. This means that most of them don't have to sell and are happy to sit on their unicorn properties while collecting ever-increasing rents until someday they finally decide to cash out, or never sell and simply pass it on to their next of kin.
I know I sound like the biased broker in saying this, but because of all the reasons I've laid out above, it's only going to get more expensive to buy small to mid-sized (30-60k sq ft) freestanding industrial properties, which is sort of the holy grail for most of my clients. Not even accounting for the natural broad-based appreciation that the industrial market as a whole is likely to experience in the coming years, this particular subset of that market should have additional strength because there is literally no new supply coming to the market. As in any market, where there is zero new supply being added and demand continues to tick up, that's a recipe for bullish upside.