warehouse space

Warehouse space pegged to prosper in 2016

Rental housing and medical office properties also among top real estate prospects
Thursday, October 22, 2015

Real estate industry insiders see the industrial sector as the likeliest beneficiary of the decline in energy prices and Canada’s weak dollar. Accordingly, a pick-up in exports coupled with lower transportation costs should translate into increased demand for warehouse/distribution facilities. Meanwhile, community shopping centres and medical office properties are considered resilient in a sluggish economy and consistent stable performers when good times return.

The newly released Emerging Trends in Real Estate, 2016 — the annual forecast and analysis from PwC and the Urban Land Institute (ULI) — predicts those three property types will be among the better performers as the Canadian real estate market generally cycles downward. New purpose-built rental housing is also generating investor interest as it becomes increasingly difficult and costly to acquire existing stock, although some of the report’s sources advise new construction is a leap best left to long-term holders like institutional investors and large REITs.

“Caution and prudence characterize today’s Canadian real estate players,” the PwC/ULI report observes. “Many of our survey respondents suspect that Canada’s real estate markets are due for a breather after so many years of economic and real estate expansion — and they’re acting accordingly.”

The report’s conclusions are drawn from: personal interviews with real estate developers, owners, managers, sales and leasing specialists; written responses to questionnaires; real estate market fundamentals; and wider economic data. When asked to rate the investment and development outlook for six property types, Canadian evaluators placed nothing in the “good to excellent” nor “abysmal to poor” categories. However, all property types except single-family residential are gauged “fair to good” investment prospects for 2016.

Of these, industrial properties are assigned the most favourable investment and development potential, attaining a score of 3.61 out of 5 on the investment scale and 3.43 out of 5 for development. Drilling down to more specific property uses, fulfillment centres, warehouse space, medical office and neighbourhood/community shopping centres rank as the top four (out of 16) investment prospects, while warehouse space, fulfillment centres, medical office and luxury rental housing are considered best bets for new development.

Export activity bolsters distribution facilities

The report points to economic, technological and cultural factors in the ascendancy of warehouse/distribution facilities. Logistics hubs serve an anticipated export uptick as an improving U.S. economy spurs product demand and associated exploitation of an exchange rate that favours American importers. Toronto and Montreal warehouse space, with proximity to the Canadian manufacturing belt and large markets in the U.S. northeast, appears well situated to capitalize on this dynamic.

The PwC/ULI report further speculates on other possible economic spinoffs. “Should U.S. firms choose to capitalize on the stronger U.S. dollar to hire skilled Canadian staff, the office sector, especially suburban office properties located near or on transportation hubs, may also benefit,” it suggests.

Domestic consumers also figure in the projections for industrial properties as the rise in e-commerce makes distribution centres a prominent piece of the retailing formula. “Smaller store footprints, locations that combine both retail and distribution functions and click-and-collect facilities will become increasingly common,” the report forecasts.

Functionality has been a key aspect of competitiveness and new industrial development in recent years, resulting in buildings with lower ceiling heights being consigned to obsolescence. Now, retrofit/redevelopment of older properties is identified as an increasingly popular option — particularly to avoid a move to other side of the Greater Toronto Area’s extensive protected greenbelt — often deemed more cost-effective than new development.

Existing stock not in sync with market demand

Likewise, the cost of new development and uncertain paybacks in a market frequently subjected to regulatory controls have traditionally been an obstacle to the development of new rental housing. However, the somewhat meteoric rise in housing prices — most significantly in Vancouver and Toronto — now fuels two types of demand for rental units: from a growing demographic of permanent renters who can’t afford to buy or have rejected the choices they can afford; and from older homeowners cashing out their increasingly valuable asset.

The PwC/ULI report notes that neither consumer group is likely to be highly satisfied with existing rental housing, the bulk of which dates back to the 1960s and ’70s. In any case, investors have few options to tap into this demand via existing supply, which almost invariably comes with low cap rates on the rare occasions it’s up for sale. While this reality underlies a current surge of new purpose-built projects, other survey respondents seem content to simply watch neophyte developers from the sidelines.

“Some observers have raised concerns about new players entering the multi-residential market and competing with established players,” the report states. “Multi-residential is a unique segment, and new players may find themselves facing greater-than-expected challenges.”

Similar factors — demographics and perceived inadequacies of existing stock — help position medical offices among the forecast top-four properties for 2016. In addition to providing space, real estate insiders foresee opportunities to provide administrative and technological business services that health care professionals are often happy to offload.

“The key trend is toward fewer but larger medical offices,” the report explains. “Individual doctors’ offices are increasingly a thing of the past. More and more doctors are sharing spaces and costs, and even co-locating with labs, walk-in clinics and other complementary health care services in the same building.”

Leave a Reply

Your email address will not be published. Required fields are marked *