Toronto Industrial Real Estate: State of the Market

[00:00:00.000] It’s the end of the week, and I have a very special guest on today, Rob Renaut, often considered the Oracle of Ontario industrial real estate. How are you doing, Rob?

[00:00:13.710] Great. How are you doing, Charles?

[00:00:15.260] Excellent. Could you do me a favor and just sketch out your career so people know the perspective that you’re bringing to the table today?

[00:00:26.800] Absolutely. And thank you for inviting me to the podcast. I really look forward to participating today. I grew up in Windsor, Ontario, which is a manufacturing town. Obviously, the world continues to change. In 1996, I almost 30 years ago, joined a company that focuses on tenant representation, which is only one slice of the commercial real estate industry. And what we do, and what I’ve done for this time, is represent corporations to help them buy, build, lead, lease, develop facilities, predominantly focused on industrial and office all over Canada and all over the world. And we’ve had the good fortune of working with a number of large organizations including third-party logistics companies, distribution companies, manufacturers, and have executed a large number of projects. Encore Advisors is ISO 9001 certified, and we’re a team of about strong. And all we do is tenant representation. And it’s a interesting market, to say the least today, as it relates to all the economic shifts happening globally and here in Canada.

[00:01:44.060] Thanks, Rob. One of the things that I think, I don’t know if you know this, Rob, but the audience is constantly growing. It’s exploding. But not everybody understands the nuances of the various topics we cover. And one of the things that I learned, actually probably a lot later in my career than I should have, is the concept of tenant representation. If I can set it up this way, a lot of people might think a broker is just thinking about a transaction. To be truly excellent at tenant representation, maybe you could help explain how that is so far from what actually happens in your world.

[00:02:36.070] That’s a great question, and thank you for asking it. It’s true. Even in a world where tenant representation has existed for probably 40 years, maybe 50 years, it’s very different, the focus that we have and how we do it. So if you drive down the highway and you see a big billboard or a sign, it has advertised for lease or for sale. Those people that that have those signs traditionally represent developers and investors. They do a great job of it, especially the larger firms. Our company has chosen for over 50 years, focus on tenant representation. And so if you were to have your income taxes filed by CRA, that wouldn’t be a good thing. It’s not that it’s a bad thing that brokers represent both landlords and tenants in the major firms. It’s just that we choose to do one thing really, really well. And so in that regard, the documentation that we deploy on behalf of our clients is rigorous, it’s thorough. It’s focused on one client’s needs only. And in negotiating contracts and advocating for our clients, it’s much more driven from the point of view of through the lens of the tenant and almost like a consulting type role.

[00:03:57.520] And so really what we care about as well is we go the extra mile to make sure we get it on point. We’re not there just to be a middleman or middle broker. We’re not there representing one side of the one day, the other side, the next day. We do one thing very well. And we bring in expertise like Lid to help us with our clients execute strategies before we go to market. So we’re not there just to transact. We’re there to be an advisor, and we’re there to drive towards the best outcome for our your clients.

[00:04:32.010] I don’t want to put words in your mouth, but the way I… I’ll give you my observation. My observation would be that you are generally much more use and outcome focused in terms of whether a building is, or a potential development of a building is going to serve the business needs of your clients in a way that I think is special. Fair or not fair?

[00:05:07.310] I would say that. Thank you. Yeah, we like to think so. And because the only business we get is through either repeat business with clients or word of mouth. We go the extra mile, we think, in trying to achieve those those outcomes. As I say, we’re not waiting for a sign call hoping that we’re going to get lucky and represent a tenant who’s calling one of our properties. So we don’t do that. Some of our projects, Charles, can take years to complete because we want to find the right solution for the client. And we’ll be talking about some of this stuff later today about how complicated it is in certain uses, for example, the cold storage industry, specifically, and how hard it is to find a building and what goes into it. What are the drivers? And we really pride ourselves on thinking through that.

[00:06:00.650] Well, I mean, that’s a great segue then. Let’s talk about your primary focus in life. I know you work pretty much wherever, and you have a large network of colleagues across really the OECD at minimum. But you are, as I said, you’re the Oracle of Ontario, by which I mean you can give us an insight into what is third largest industrial real estate market in North America. So what happens in the GTA, the Greater Toronto area, is really an important indicator of what’s happening across the continent. So let me ask you, starting at the very highest level, what’s going on in the industrial real estate market in Ontario these days?

[00:07:00.820] Well, I would say that it’s in a state of flux. And it’s no surprise that during the pandemic period and then post-pandemic, there was a pent-up demand for e-commerce-based transactions. And so that forced a lot of retailers to secure large bulk distribution centers to turn product quickly and get into the hands of consumers close to the market And so it forced a significant amount of new construction of modern, efficient facilities with great loading and great trailer parking to be able to accommodate that, call that not just in time demand, but certainly accelerating unprecedented demand by consumers. And of course, that’s hit all kinds of different categories across the board. And I think what’s happened is that since people have gone back Back to Main Street, as opposed to sitting in their houses shopping all the time, there’s been a bit of a little bit of the hot air has come out of that balloon. That plus the economy does work through cycles. And of course, we have tariffs now, which is only a recent phenomenon. But what I would say to you is that the combination of all these factors of getting back to normal with life and then probably record consumer debt as well, although Canada is fair as well as far as managing that, it’s really a beta demand for industrial buildings by those businesses that cater to to, specifically, consumers.

[00:08:46.910] And that’s not universally the reason why we’re seeing a drop off in demand for industrial real estate. But suffice it to say that that plus the tariff discussion, which is ongoing and changing by the minute it feels like, have really had an impact on global supply chains, of which Toronto is a very important part. So what I’ve seen, Charles, is although the industrial vacancy rate has certainly come up from an all time low of sub 2% in Toronto, in the Greater Toronto area as an example. And this is not a trend that we haven’t seen elsewhere. It’s a fairly common thing. I just came back a global conference two weeks ago. And the common theme amongst most major markets is there’s an oversupply of buildings, beautiful brand new big buildings that are in primary, secondary, and tertiary markets to chase that demand. And now there’s a bit of a blood of supply, and it’s sitting, and there’s more opportunities for tenants. But it’s not an unhealthy market. It’s just that there’s way more choice than there was a year or two ago because the fact that the breaks have been pressed a little bit by companies looking for space in the marketplace.

[00:10:13.160] This is really interesting. So we just did, and I know you’re an avid fan, so you must have seen it. No, I’m kidding. But we just did a podcast where we were looking at warehouse construction starts and how they are than they’ve been in about 13 years. That’s a US statistic. Everything you just said echoes with what we’ve read and how we’ve experienced the market in terms of how much of our work is renovation or reengineering of operations versus new builds. But I’m curious. I would have said, up until January, I would have said, well, there seems to be an uptick in folks thinking about more major projects like relocation, even greenfield. And then what you’re saying about, what are your clients saying to you about When you talk about the tariffs? Is it pausing or slowing down decision making?

[00:11:23.610] I think it’s sector dependent. We just actually helped, for example, one large retailer through a third party logistics client of ours, set up, it’s actually being mobilized right now, a brand new, almost 400,000 square foot distribution center in Canada. And it’s a dedicated facility. It’ll be amazing when it’s launched. A lot of technology in there and even an office for a number of workers. So I’d say that the upscale retail has been fine and we continue to see flight to quality. That’s a trend that’s been going on for many, many years. But you have what I would call, in some respects, more commodity-based industries. Not to suggest that the automotive sector is a commodity Because that continues to see innovation, especially within the EV market. But it’s like there’s been so much investment and so much excitement within the auto sector that, again, the demand for large of large buildings, I think perhaps the exuberance has started to stall a little bit. And we’ve seen some business parks that have been set up specifically for automation or automotive automation and automotive, specifically. And the amount of transaction volume we’ve seen has not been as high as it has in previous years.

[00:12:55.970] So we know how the tariffs specifically impacted the market in general. I think we have moved away from being a manufacturing economy to a distribution economy over the last 2-3 decades. And that is predominantly driven by the fact that there’s cheaper labor, cheaper cost of goods sold in far-flung countries like China and other places like that. That may change in time with these tariffs, potentially more in the US than Canada. But I would say that the tariffs have impacted more manufacturing the distribution. And those jobs don’t tend to be in the GTA. They tend to be in smaller communities like Kitchoualoo, Windsor, London. But it’s interesting. I’ll be very fascinated by what happens with respect to the tariffs. I think consumers are going to feel the pinch, and that will have an abating impact on the demand for goods and services. And And over time, that’ll probably have a further monitoring impact on the need for distribution centers. But again, that’s going to come months from now. It may be felt a little bit now, especially grocery, but it’s not like it’s an immediate impact, Charles.

[00:14:14.540] My question to you would be, can we just spend a few minutes talking about the cold storage world, near and dear to my heart? What’s happening there? What are you seeing?

[00:14:30.980] I think what you’re seeing, Charles, is a slow regulatory-driven, consumer-driven metamorphosis of that marketplace. And I wanted What I mean by regulatory is, of course, with the spike in demand for power from data centers, which makes it cold storage facilities, especially freezers, are huge consumers of power. And so we see that. We see the ESG effect, like the sustainability movement continues to put pressure on companies to consider alternatives to drawing power from the grid. It could be a solar or other types of power. And I think just overall a need for increased food safety. You see that a lot of the There are buildings that are out there, production facilities and distribution facilities, they’re second, third generation buildings that were built many, many years ago, and they’ve been adapted to suit the needs of manufacturing and distribution users that are in the cold, let’s say, the cold chain in the cold sector. But those aren’t good enough today. I think you hear about product recalls. It’s not just because of food safety cold storage buildings, but things like condensation within the building envelope is a no-no that definitely impacts food. So the regulatory side certainly has put a lot of pressure on the sector.

[00:16:17.110] And of course, you have the evolution that’s driven by innovation, AI, technology, automation. We’re living in a world today that has unprecedented change. And so a lot of the buildings that exist today that are deemed, let’s say, cold storage, again, predominantly focused on freezers, are old buildings that need an overhaul. And it’s a very interesting time from the point of view of all those shifts because the market just doesn’t have the space. Most large North American markets, in particular, they probably have, truthfully, a zero, if not negative amount of vacancy. There’s so much demand. It exceeds what’s there in terms of supply. It does not exist the kinds of facilities that companies need today to operate that addresses those kinds of drivers.

[00:17:17.950] It’s funny. I always think that the sequel to Field of Dreams should be Freezer of Dreams because build it and they will come is the truest First thing to say about large scale industrial freezers. I have a question. So the regulatory point you brought up is really interesting to me. It’s something I think about a lot. It’s something that some of my clients have experienced in a very localized way. I would ask you, because do you think that there’s somebody in some basement of a Ministry in Ottawa or in Washington, depending on where you are, who has done the math and realizes that these two things, our access to food and our need for data centers, are right now actually in conflict because they’re fighting over the same fixed slice of power. Do you think anyone’s on top of that?

[00:18:26.140] I think that, especially in not knocking the US administration, but the focus is on what’s, pardon the pun, but what’s sexy, right? And AI right now is a very hot thing. And food is always deemed an essential good, right? And we’ve been able to get by. And to this point in time, not have to worry about having modern facilities that are more efficient that don’t draw as much power. The truth is, what’s interesting, Charles, is that by supporting the development that the government got behind supporting the development of modern, very efficient freezers as one use case, the amount of power drawn in those buildings would be a lot less than what we have today, probably if you replace the supply of how these buildings operate, like the actual cubic volume that sits in a lot of these older generation buildings. So I think that the food sector is often taken for granted because it’s an essential. You do see innovation happening, like Talas is setting up a brand new building out in Oshua. We help Arla Foods set up a brand new building in Vawn. And I know I’m sure you’ve had many great case studies as well.

[00:19:55.990] But generally speaking, The government really is focused on what’s hot versus what’s essential, unfortunately.

[00:20:06.610] Yeah. Well, that’s why you hope politicians drink a lot of smoothies because at some point, they’re going to realize that the frozen Blueberries got to come from somewhere. No amount of artificial intelligence can produce that. But it is interesting. I do think this is a North American-wide trend, or not trend necessarily, but state of affairs, which is there’s a whole lot of cold storage infrastructure that is a generation or more old, and therefore leaking energy, not providing necessarily the… Well, let’s say it this way. Definitely not providing a storage space quality that could be provided if something was built brand new today. I wonder, a lot of that old infrastructure tends to be family-owned, and we do have this trend of consolidation, at least in the third party logistics market, in the cold storage environment, of corporatizing these businesses, consolidating and then putting. Do you Do you think that that is going to provide an opportunity for people to shut some of this older infrastructure down and replace it? Is that in any way playing a role in it or no?

[00:21:42.650] I think over time, for sure. I think that those large 3PLs, they can’t hit every single market, especially tertiary markets. And so the smaller operators will probably still need to be in those smaller markets because the population and transportation factors doesn’t make it economical to have a fleet of trucks that are refers going down, driving four or five hours to get to a household or to a market to supply from the GAA, let’s say. But yeah, you’ve seen a ton of consolidation in that sector, and I think it’s only going to continue. And they’re chasing efficiency, and they can charge a lot less per pallet to store product in those buildings because they are the ultra modern, ultra efficient facilities, and they’re going to keep building them. The question is really going to become, though, Charles, where’s the land to build those buildings? Who wants them in their backyard? Zoning often is challenging, and it’s not often something that developers themselves want to spend their capital on because they don’t understand that sector truthfully the way that they should. We’ve had many examples of trying to find a building, and it was like even a 40 or 50 foot high refrigerator, not even a freezer.

[00:23:10.690] It looks like an ambient building that would be able to perform for 50 years and be an ambient building in 20, 30 years. Developers shy away. And so we still have a long road to go before we get to the point where a lot of those old buildings get replaced with the new modern buildings. But I’m enthusiastic that the big players that continue to consolidate the small players, because small players don’t have the capital, the infrastructure, and the expertise to do it, and the staying power oftentimes to take on those kinds of projects. But at the same time, we’re creating a Almost a monopolistic environment, especially for businesses that want to put their product in their buildings.

[00:23:51.250] You just said a couple of things that’s really interesting. I’ll make one little point. From my office, I can see 120-foot Clear Stagging Heights freezer from my office that I know is about 30 kilometers away from my office. Now, I’m in an office tower on the river, in the old port, not a brand new office tower. Nice, beautiful office tower. I do have a relatively flat and unobstructive view of it, but it is amazing that I can see it. It’s a monster. It’s a big white monster. It was interesting when you brought up about the land and maybe the local appetite for those buildings in their neighborhood, Nimbun, Nambiism. Are you seeing municipalities or public pushback against super tall warehouses in the GTA?

[00:24:58.560] I wouldn’t say that there’s been a ton of, let’s say, initiatives to bring those types of buildings. We are working on one project that was going to be about a half a million square foot project, taking an old building, and then there was a bunch of extra land, and we’re going to be building a 120 foot high expansion. It was probably going to be a 200,000 square foot, rock-supported ASRS building for one of the big US REITs that was coming to Canada, that they They bought our client, who was a local operator in Canada, and they were eventually going to build a brand new campus in Faison and knock down the old building. They didn’t do that. They continued to operate out of that building, and it wasn’t because of zoning or nimbiism, but rather price, the cost of land, the cost of construction, the timelines, the infrastructure. I would say that these These types of buildings, though, they can’t just be anywhere. If you were to take, for example, here, Ontario, the 401, which is centerized for logistics or the airport. You have like, Conjabex got a big building at Pearson. But many of these buildings are located in places where it’s close to maybe a power station or it’s near farmland.

[00:26:28.030] And you can often see these off the 407 or places where you wouldn’t- As you get further out into. You don’t have the shadowing effect, the zoning issues, the land pricing issues. But then that adds another layer of cost because transportation costs are… Right?

[00:26:47.710] No, but it’s a very good point because that building I’m referring to that I can see from my office, it is at the very edge of the city, on the southeast corridor, at the very edge of the city on the other side of the The other interesting point I want to get back to that you made is the reticence of developers to get engaged in cold storage. I guess I don’t understand. You said something, and I You said something about it’s basically zero to negative % vacancy for these types of facilities. I made the joke about freezer of dreams, build it and they come. We both have come to the same observation over our careers that especially freezers, you build it, there’s never enough space, never enough freezer space. How is it that developers who should be pretty sharp about these things, how do Do you not see that opportunity?

[00:27:48.980] To be honest, that’s a question that may be outside my pay bracket. But what I would say to you is my own personal experience, what I see is that If you’ve got strong enough credit, a long enough lease, and I guess parties that a developer with enough capital behind it to be able to pull it off and pull it together, then definitely Definitely, I think over time, you’re going to start to see this become more of a normal thing. But remember, Charles, these buildings that are being built, a lot of them are very, very specialized. If you look at the likes of Conestoga Coal Storage, you have large brand new buildings that they built, one recently in Milton. 120 foot high, rack-supported buildings, and they’re often… Most they’re automated buildings, right? And the technology goes into these things It’s hard to… Because the way these are built, the rows of racking, you better be darn sure that you’re building it to be able to accommodate enough use cases to store that product, the frozen product. A hundred %. And if you get it wrong, I mean, I’m not a ASRS expert by any means. You guys understand that world and design of the box itself.

[00:29:09.160] But I guess I’m challenged to think, how could a developer actually get it right? How could they build something on spec that would have a universal layout and be able to appeal to a wide variety of food product and not especially in a world where technology continues to change And is it going to be something that we now have 300 foot high buildings, and now the 120 foot high buildings are really out of date, or we have a different way of building them. We need a different environment to It could be the way that the energy is delivered, it could be the way that the HVAC is delivered. There’s a lot to unpack there in those kinds of buildings, right?

[00:29:55.950] Sure. But I get it. And yet part of me is thinking, yeah, but we just talked about this ancient, decrepid… Not fair of me. I’m going to be exact. Ancient, decrepid stock of freezers, and they’re still full. I mean, because people will still use them. So I say, well, anyway, we should become a developers because if they won’t do it, we know the market’s there.

[00:30:21.830] Yeah, well, it’s happening in the US. There are a speck of developments in the US, but I’d say that when they talk about it being speclet of cold stores, they’re flexible specs. They’re not rack-supported buildings. They’re going to be big boxes, probably 50 to 60 feet high. And they’re built where you could either put a freezer in a section or they have modular type of cooling set up within the buildings. And the building envelopes are built with, as you would well imagine, insulated metal panels, insulated precast panels. And so they figured out in the US how to corner part of the market, but that won’t address the efficiency, especially as a way as to hydro draw. It comes from the very efficient, very narrow aisle rack, 120 foot plus high buildings. I think I was talking to you, we did a model, an energy model. It’s almost like the most efficient, not the most efficient, but the power, the cost the most is when you’re racking stuff close to the roof, because you have the heat effect there. But I don’t know. It’ll be interesting to see how the market evolves over time and what’s built.

[00:31:46.850] There’s certainly enough money out there, trillions of dollars available to build these kinds of things by groups like Blackstone or Brookfield or what have you. But the question is, will there be enough government push for the industry to actually get it right versus just waiting and seeing?

[00:32:07.020] That’s fascinating. Rob, I’ve taken up more time than I should have with you. I know that you have a thousand things to do every day. So I really appreciate that. This was really interesting. And if the listeners are like me, they’ve learned a lot from this conversation. So that’s been really great. Thank you.

[00:32:30.820] Thank you, Charles, for having me on your podcast. I always love the intellectual capital you share, and I’m proud to be part of it and to be partners with Lids. So thank you for- Same here.

[00:32:41.280] Right back at you, Rob.

[00:32:42.780] Thank you, Charles. Have a great day.