:  I currently own a small office complex and am considering other types of commercial real estate investment, but am not sure which direction to take. Should I stick with office space or branch out?

-R.H.

A:  Retail and Office real estate accounted for only 10% each of all commercial property leased in the GTA during the third quarter of the year. This recent two-minute video report from TREB Senior Market Analyst Jason Mercer illustrates that, “80% of leasing activity was accounted for by the industrial segment of the marketand industrial transactions were up… approximately 30%,” making industrial properties worth a close look by any astute real estate investor.


13463605-LargePhoto-1Canada’s major industrial centres enjoy, on average, vacancy rates of 4 – 7%. According to the City of Toronto 2013 Third Quarter Economic Indicators Report, industrial real estate vacancy rates in the GTA continue to hold steady at about 6%, performing slightly better than GTA office space, which hovers around a 7% vacancy rate. Statistics Canada reports that Ontario alone exports close to 200 billion in goods and services annually, contributing to the current downward trend in industrial vacancy rates. Burgeoning markets are bringing industrial properties into their own in recent years, with optimistic fiscal performance outlooks growing even stronger.

Technological advances during the last 25 years have greatly impacted our global economy which, in turn, influences commercial real estate markets. Deregulation in the trucking industry and new infrastructures that coordinate air, cargo, rail and trucking transportation have led to broader competition. With new and more diverse competition comes increased pressure on industry to deliver products and services faster than ever, and to warehouse inventory in ways more in keeping with shorter delivery times. Industrial warehouse facilities are evolving to meet the changing needs of our marketplace.

Chart: City of Toronto “Economic Indicators” September 2013

For major distribution hubs like southern Ontario and the surrounding Golden Horseshoe region, modernized and flexible warehouse and other industrial properties are seeing an increased demand from manufacturers and service providers. Increased globalization, decentralization, a weakened American dollar, and our North American Free Trade Agreement (NAFTA) have all influenced Canadian economic parity, creating greater local demand for industrial properties to meet the global demand for goods and, of necessity, the storage inherent to warehouse goods between manufacturer and consumer.

In today’s economy, traditional factories for both light and heavy manufacturing are steadily being replaced by the spatial demands of design firms, research and development, engineering, and high-tech manufacturing, affording investors a wide choice of opportunities in both new builds and older properties in need of refitting to modern standards. Modern suburban areas are especially suitable for today’s new commerce and industry, and often provide access to an underemployed work-force among the local population.

 

13726844-LargePhoto-4Another important aspect that appeals to commercial real estate investors is that industrial property tenants are not prone to change addresses, once in place, so seek out long-term leasing situations. Continuity for their customer base is one reason for this inclination. Leasehold improvements that facilitate a commercial tenant’s particular brand of commerce is also a major factor, since that necessitates capital expense outlays for the tenant at the outset. Some tenants will negotiate their commercial lease so that the property owner provides some or all of the leasehold improvements necessary to their business, which is then reflected in the rental cost of their lease, often within the first few months or years, lowering the risk for property owners.

Providing leasehold improvements to tenants is not recommended when leasing to newly formed corporate entities, but common to tenancy situations for Fortune 500 companies; the cost of any modifications remains borne by the tenant, through the lease’s provisions, but over time. Be sure to include a lengthy enough lease term to make any modifications financially worth your while, and to also include a cash penalty for ending the lease earlier than the time frame that offsets your own capital investment. Amortizing costs associated with both obtaining and adapting your facility to their needs is how your tenant’s business justifies capital expenses in their own budget forecasts as well, making them even more inclined to agree to longer term leases when funding leasehold improvements out of their own coffers.

Consider industrial real estate as commercial realty’s smart, quiet cousin. When considering your next investment, industrial property can offer a level of reliability and security for buyers that facilitates a steady and stellar asset performance.

Source: Toronto Real Estate Board Commercial Realty Watch | Third Quarter 2013