While it’s no longer on fire as it was during the pandemic and vacancy rates are on the upswing, Montreal’s industrial market still favours landlords, says Vincent Iadeluca, senior vice-president, real estate broker at Colliers.
Iadeluca said the industrial availability rate in Greater Montreal will likely increase to about four per cent in Q2 from 3.5 per cent in Q1. But given that a balanced market is considered as being at five to seven per cent availability, “even if we’re at four per cent, it’s still landlord-leaning.”
He was among the speakers at sessions on Montreal’s industrial market and on national investors’ perspectives on investing in the city during the June 6 Montreal Real Estate Forum at the city’s convention centre.
Iadeluca added the vacancy rate in the Montreal area should increase from 2.9 per cent in Q1 to about 3.25 per cent in Q2, while the average net asking rental rate will likely drop from $16.07 in Q1 to about $15.65 in Q2.
Plenty of options in the 100,000-sq.-ft. category
Iadeluca said he is seeing “huge amounts of inventory” in the 100,000- to 200,000-square-foot range, with about 30 options available on the island of Montreal. Most of the buildings are class-B with 18-to-24-foot clearances.
“If you’re a tenant in that size category, now’s the time to strike that deal,” he said. “You’ll be able to get a lot of incentives to get that done.”
Scott Speirs, vice-chairman, investment team at CBRE, said Montreal’s industrial market has slowed after a few years of near-zero vacancy rates and “absolutely extraordinary rental growth.”
Sub-sectors have diverged, Speirs noted, with small-bay continuing to see rental growth while large-bay “is feeling some headwinds” and experiencing decreasing asking rates.
Whether industrial vacancy rates in Montreal are 3.5 per cent or 5.5 per cent, these “are not numbers that you should be afraid of,” David Ruta, vice-president, investments at GWL Realty Advisors.
“Coming off a few years where we saw 40 and 45 per cent rent growth, presumably we all understood that that was not sustainable.”
Montreal still lacks high-quality, modern space
Ruta noted that compared to other major Canadian markets, Montreal does not have a good supply of quality modern industrial distribution facilities despite the fact it’s the second-largest city in Canada.
As a result, retailers and others who are looking to modernize their supply chains to serve the city are competing for a relatively small supply of good quality product, he said.
Steven Bouffard, vice-president, leasing at Pure Industrial, said demand remains very positive for small- and medium-bay industrial in Montreal.
Demand is being buoyed by clients who are seeking good locations near employees, clients and suppliers, he said.
Given current construction costs, from a cost-efficiency standpoint it’s very hard to increase the inventory of small- and medium-bay industrial, Bouffard noted.
James Beach, vice-president, real estate development at Broccolini, said some larger-scale clients which used to lease spaces are now gravitating toward buying as they seek greater control over the design and quality of their buildings. “Before they were tenants; now they’re clients.”
Owning their own specialized buildings enables end-users “to do exactly what they need to do to be operationally efficient, hyper efficient, allows them flexibility to not deal with a landlord if they need to make a radical change.”
Tougher times for “COVID cowboys”
Iadeluca said he is seeing many tenants consolidating multiple spaces. During the COVID-19 pandemic, “there was literally no space available so (tenants) were renting anything that they could get their hands on, whether it was class-A, -B or -C.”
In addition, there is the phenomenon of what Iadeluca described as “COVID cowboys” – 3PLs that took on any space they could get their hands on during the pandemic.
The “COVID cowboys” are now in trouble as many were forced to sign long-term leases during the pandemic when the market was hot despite the fact they only had short-term commitments from large retailers.
Now these “COVID cowboys” are “stuck holding the bag with empty warehouses and trying to figure out how to pay for the rent.” Some are now out of business, with their former spaces on the sublet market.
New, higher taxes to have impact
Paul-Éric Poitras, managing partner at brokerage NAI Terramont Commercial, said the federal government’s proposed change to capital gains taxes has had a major effect on the sales of industrial properties.
If passed, it would raise the capital gains tax inclusion rate from 50 to 67 per cent for corporations and trusts on the sales of investment properties.
“June will be a record month for me personally,” Poitras said, noting transactions that were dragging out are now closing as clients seek to avoid the tax increase.
Laurent Paquin, first vice-president of brokerage PMML, warned new taxes are coming as municipalities continue to seek ways to tax industrial properties in addition to property taxes. Some are charging a tax on asphalt to counter heat islands, he noted, with one client being charged $500,000 annually.
“That’s just one of the taxes that’s coming,” he said. “Cities are very creative.”