Canada’s industrial real estate market is evolving, giving buyers and lessees greater leverage as vacancy rates increase to levels not seen in years.
“Industrial landlords in market as a whole are navigating a shifting market marked by six consecutive quarters of rental rate declines, now down $1 per square foot year over year, while availability has stabilized for the first time in 10 quarters,” Matt Albertine, senior vice-president with Colliers International wrote in a recent logistics and transportation market report.
In a follow-up interview with trucknews.com, he said industrial property vacancy rates averaged around 5.5% for about 20 years leading up to 2017.
“Then, you saw that growth through 2017 to 2019 as the first blip. Then you saw the 30.5% growth in 2021 and 31% in 2022 and so on. Then, availability and vacancy dropped to 0.5%,” he explained. “Fast-forward to today, we’re now at about 5.7% availability, so we’re back to a balanced market from a landlord and tenant perspective.”
As commercial real estate boomed in recent years – commanding up to $4-$5 million an acre for trucking-suitable outdoor storage sites – buyers have run into higher interest rates and a greater reticence among banks to lend money. Some landlords purchased vacant industrial land at the peak and due to lengthy permitting processes in Canada have yet to monetize those properties, having just completed construction of buildings.
Underwriting an industrial property in 2021 or 2022 when “the market was at the lowest availability ever” has required some landlords to redo their math, given the current environment.
Given soft conditions in the freight market, 3PLs and trucking companies are seeking more flexibility in their leases, and for the first time in several years they’re getting it, Albertine said.
“Two years ago, a landlord would laugh at you if you asked for a six-month lease,” he said. “Today, some will say ‘no worries.’ There are enough options now you can choose one or two of the 30 available buildings.”
Trade war impacting industrial real estate market
This is especially useful for trucking companies or 3PLs with seasonal demand. Much of the softness in trucking real estate stems from the imposition of tariffs by the U.S. and the related impact on trade.
“Many people just want to go short-term,” Albertine said of those looking to lease space. “If I typed the word ‘uncertainty’ into my Outlook search bar, it would come up very often, so it’s definitely having an impact. I think when we can sort out whether we have free trade or no free trade, then companies can make decisions. It’s this yo-yo that’s causing the stress.”
Justin Zarnowski is general counsel with commercial real estate Shindico, which recently acquired TransX’s portfolio of properties across Canada. He has also seen first-hand the impact tariffs are having on transportation real estate.
“I think there’ll always be demand for high-quality assets,” he said. “For the market generally, we’re seeing a real softening of people who are willing to make new investments in space. For new buildings that people are putting up – including us – there’s been less traction and interest because of that uncertainty around tariffs.”
Any kind of move, Zarnowski acknowledged “is a massive capital expenditure” even if it’s just relocating employees between corporate offices or reconfiguring warehouse racking systems.
“We’re just seeing a lot less willingness in the market to make those investments right now,” he added.
New opportunities
That’s not to say the market is dead. Transportation companies are still looking for opportunities to consolidate their operations or locate more strategically, including some of whom are acquiring properties in the U.S. – and even Mexico – for the first time.
“You have some organizations in transportation and logistics consolidating into one warehouse versus operating in multiple,” Albertine said. “A line to me from a trucking guy was ‘Why would I have four yards where I have to pay eight security guards and I need to pay four sets of insurance?’”
And with the growth in the trucking industry, particularly in Ontario, there continues to be growing demand for outdoor yards with truck and trailer parking availability.
“Leasing is in very high demand for truck parking right now,” Albertine confirmed.
Mexico is booming
Getting back to shifting trade patterns, Colliers International has seen strong demand for Mexican industrial real estate.
“The rental rate in U.S. dollars can be almost as expensive as some of the major markets in the U.S.,” Albertine said. “You’re seeing a lot of focus there from trucking and third-party logistics companies that are following where the automotive plants have opened.”
One thing that hasn’t changed in the industrial real estate market is location is king. Albertine said transportation providers are looking for opportunities near ports and rail yards. Sites with buildings already on them are in greater demand due to the painstaking permitting processes in Canada.
“They don’t want to buy vacant land and use their capital to run three years of interest payments with no ability to make money on the site,” he reasoned. “What’s in high demand is something along Hwy. 401 that has a small shop on six to eight acres. There’s a lot of demand for that.”
Given the shifting dynamics and increased leverage potential buyers and lessees are enjoying, is an industrial real estate crash on the horizon? Albertine doesn’t think so.
“One interesting thing that tells me there’s not going to be a crash is there’s a lot of demand from institutional ownership for IOS (industrial outdoor storage),” he said, noting large investment groups continue to buy up industrial space. “There’s a lot of smart institutional money buying these properties. Now, will the price continue to drop? Yeah, I think it definitely will, because the people that typically buy them [transport companies] are struggling.”
If you’re a well financed transport company looking for a new home or to expand, Albertine said now is a good time to do so.
“It’s a great time to buy in the area you actually want to be in, versus an area that’s available,” he said.
Best deals often not listed
However, he suggested prospective buyers keep in mind many of the best properties never make it to a public MLS listing.
Sellers who may be under financial duress often like to keep such listings out of the public eye to avoid speculation on their financial wellbeing. Buyers with cash will also be in a better position to close quickly since banks are more heavily scrutinizing the loans they issue.
“Work with someone who is connected in the industry and can point you to something that’s not on MLS,” Albertine suggested.
Buying vs leasing
While new buying opportunities in the industrial real estate market are emerging, leasing remains a better option for some companies.
Shindico’s Zarnowski said purchasing your real estate offers the benefit of owning an appreciating asset and protection from sharply increasing lease rates.
“For the longest time, that wasn’t a big risk because market rents were pretty low and stagnant,” he said of rental rates. “Whereas in the last five to 10 years, they’ve certainly been increasing.”
The flexibility of leasing also allows transportation companies to move into a larger space as demand dictates. “It gives them the opportunity to not be pigeon-holed into one location,” Zarnowski said.
But when taking the long view, transport companies that own their properties will see a payback when it comes time to sell the business, noted Peter Stefanovich, president of M&A advisors Left Lane Associates.
“In terms of M&A, a transportation business that owns real estate has an extra value add for a purchaser,” he told trucknews.com.
“Owning land allows a purchaser to borrow against that property to help purchase the transportation business, making you more attractive to a larger pool of buyers. Owning your own land also helps decrease the risk of outside landlords to a buyer. The lower the risk to a buyer, the higher they pay for your business. If you ever have the chance or ability to own your land, do it, as it helps control your ultimate destiny, a very successful exit.”
