Prepare for sticker shock in the warehouse market
It’s hard to be profitable in trucking without strategically located facilities. Several large players recently told me they consider themselves to be in the real estate business, not the trucking business. That’s how important dirt is to our sector!
If you’re one of the lucky ones who owns your own real estate, the last year has been a windfall. Count your blessings.
If you lease your facility and haven’t been paying attention to the market, you’re in for serious sticker shock come renewal time.
According to my pals at real estate broker Colliers International, Canadian cities have some of the lowest warehouse vacancy rates in the world. Toronto’s vacancy rate of 0.5% makes it the tightest warehouse market in North America, closely followed by Victoria, Vancouver and Montreal.
Colliers’ competitor CBRE reports that the industrial real estate availability rate across Canada was at 2.9% in the first quarter of 2021, down from 3.1% the same time last year. The company says 2.4 million square feet of logistics space is under construction but most of it is already leased.
It’s possible that Canada could run out of warehousing by the end of the 2021.
Amazon effect, Act 2
The competitive havoc Amazon has wreaked on retailers over the years is legendary, but it’s only Act 1. In Act 2 it’s doing the same to the industrial real estate sector.
According to Statistics Canada, e-commerce shopping was up 111% year over year to $3.5 billion in January 2021. The boom in pandemic purchases led to industrial space getting gobbled up like never before.
Amazon alone has gained 12 million square feet to its distribution footprint since 2019. Other companies are ferociously adding warehouse space as they try to keep up with Mr. Bezos and our new retail buying habits.
In the first quarter of 2021, Vancouver had only one warehouse available with more than 100,000 square feet. Even with developers kicking things into high gear, supply is expected to be short by 20% during the next five years.
Last month a very successful trucker friend called me crying in his scotch. His company’s 10-year lease was up for renewal in a year, and not only will the expected increase destroy the bottom line, it’s putting the entire business model into question.
To say that occupancy costs are going up is an understatement. Colliers reported that the cost of leasing industrial space increased by a whopping 25% in 2020.
In the Greater Toronto Area the average net asking lease rate is $10.45 per square foot—an all-time high after 16 consecutive quarters of growth. With rates up 90.8% in the last five years, a five-year lease has close to doubled.
It’s not far-fetched to expect lease rates to grow at a 10% clip per year.
What to do?
There is no silver bullet to high real estate costs or tight capacity.
Prices have made buying property beyond the reach of most truckers that aren’t already in the game. It’s like a millennial trying to buy a first house in Vancouver without Bank of Daddy.
Planning years in advance and working with your landlord are the most prudent first steps. The sooner you understand your options, the sooner you can build the inevitable price increases into your business model. If you expect the cost of your real estate footprint to double in two years, you should work those numbers into this year’s budget.
It’s also important to think about potential locations outside of traditional urban areas. E-commerce facilities rely on unskilled labor who often rely on public transit to get to work. Truckers can find more flexibility and affordable prices in rural areas (where many people now want to live) and feel far less pressure than they would closer to a city.
For every trucker who looks in amazement at their invoice because they figured rates couldn’t get any higher, there’s a commercial real estate broker on the other side of town thinking the exact same thing about the price of dirt under your feet. Don’t wait to start navigating your way through our sector’s latest challenge.