There is no question that Canada’s industrial market is too hot to handle these days.
While office vacancy rates rose during the pandemic as white collar workers retreated to their homes, demand for industrial space accelerated. National industrial vacancy fell as low as 1.7% in Q2 2021, according to Colliers’ latest market snapshot report. Vacancies reached record lows of 0.4% in Toronto and 0.7% in Vancouver.
When Canada came out of the 2009 recession, the industrial real estate market was fairly soft; there wasn’t strong absorption, rents were flat and land prices were stable. But as Canada moved away from the financial crisis and began to recover, the industrial market started a remarkable climb and hasn’t really slowed since.
Too much demand and too little development. That’s a problem that continued to push up rents and put pressure on our national economy as vacancy rates dropped by at least 100 basis points per year.
Then came the COVID-19 pandemic and along with it, a tremendous increase in e-commerce activity, causing rents to skyrocket and vacancy rates to tumble. With the rise of e-commerce and the need for additional warehouse space expected to continue beyond the pandemic, it is unlikely that developers will be able to keep up with the booming demand for industrial space. As a result, Canada may experience a shortage of industrial space for years to come. This isn’t a new story, but the time for casting blame is over. It’s time to start thinking up some creative solutions.
Launch a national industrial development task force
To meet the demand for space, we need to create more supply. To do that, the zoning and permissions process needs to change. There are two major gaps in the process: the length of time it takes to get development site plans approved, and the length of time it takes to get lands entitled. It can take developers three to seven years to get a site properly zoned and serviced, assuming it’s already designated, and then another nine to twelve months to get through the site plan application process.
The public and private sectors need to come together and form a national task force to guide and streamline the development process. There are too many stakeholders involved and too many delays to get shovels in the ground. Rather than continuing to work in silos, developers would benefit from a permissions task force to direct and streamline the process from coast to coast to coast and hold all parties accountable.
Be daring when it comes to stacked industrial
Planners, developers and builders need to be bolder with industrial projects. That means we need to expand our appetite for and acceptance of stacked, or high-density, industrial buildings.
While we need to respect the end users of the building and surrounding residents and neighbours, developers shouldn’t be afraid to pitch multi-storey industrial buildings that blend with office, retail and other uses. (And local governments shouldn’t be afraid to approve them).
A great example of this is Marine Landing, Vancouver’s first twinned six-storey, stacked industrial and office complex, offering workspaces ranging from 600 to 34,000 square feet. The planned buildings in South Vancouver on the Canada Line mass transit network have industrial features such as oversized parking spaces, freight elevators and wide corridors, and the complex is located 20 minutes away from downtown Vancouver in a bustling neighbourhood with homes, office, retail, food, groceries and entertainment.
Developing larger, mixed-use buildings in areas where people already work and live can help alleviate some of the challenges we are facing when it comes to industrial space in major markets.
Don’t be afraid to build in the suburbs
In recent memory, developers have had little motivation to develop key industrial projects outside of metro centres, but times are changing. There is now a significant price delta between industrial product in urban cores and outlying areas, so businesses are increasingly looking to relocate to markets like Chilliwack, B.C. and Hamilton, Ontario.
The wants and needs of employees have also changed, making it easier for businesses to move their operations. Crazy-high housing costs in Vancouver and Toronto, combined with rising eagerness to escape our cities amid the pandemic, means more people are willing to live further from metro areas.
Finding suburban employees is no longer as challenging and some workers may welcome the move to a smaller market where they are able to have access to a greater quality of life.
In the U.S., we recently saw Walmart lease a 1.1 million-square-foot warehouse in Joliet, located more than 45 minutes from Chicago, as the retailer continues to ramp up its e-commerce strategy.
This trend is also taking hold in Canada as more companies look for cost-efficient industrial space. There have been a number of high-profile occupiers relocating their distribution centres to “secondary” or "peripheral” markets outside the historic core distribution markets.
Among the most notable are: Ford Canada, which announced a 500,000-square-foot distribution centre in Brantford, Ontario; international retailer H&M, which leased 700,000 square feet in Ajax, Ontario; and Bridgestone, which took 450,000 square feet in Hamilton, Ontario. Developers should not shy away from building outside of core markets because businesses and people will follow.
The industrial market has evolved, and with Canada seeing record-low vacancy rates like never before, the time is now for the industry to be bold and seek solutions for creating more industrial supply.