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Today, Goran Brelih, a Senior Vice President for Cushman & Wakefield ULC, is our guest columnist. Brelih has been servicing investors and occupiers of industrial buildings in the Greater Toronto Area for the last 27 years, and has been involved in the lease or sale of approximately 25.7 million ft² of industrial space, valued in excess of $1.6 billion dollars.
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The Impact of E-Commerce on the GTA Industrial Real Estate Market
The recent pandemic and economic shutdowns forced all of us to re-establish our priorities and to re-think our businesses, our relationships, and our lives, in general.
The weaknesses and risks in our day-to-day were exposed, leaving us with the opportunity to form new habits and find innovative solutions.
If we look at our world from March 2020 onward, the majority of our services and day-to-day operations moved indoors. Many of us adopted systems to communicate and collaborate virtually, while also implementing protocols to ensure safe meetings and tours should we be forced to venture out. Were one to sit on a Toronto rooftop and observe the passer-goers, they would find, well, that there weren’t very many.
Life would seem still; almost tranquil.
Except for one constant.
The movement of things.
Specifically, the transportation of physical goods to places of business and residence.
E-commerce. Online retail. Grocery delivery. Meal kits. Home office equipment. Pet food. You name it. All delivered to your door (oftentimes) within 24 hours… except for the sold-out stationery bikes, PPE, and office furniture.
These novel behaviours were borne out of necessity, however, as we adapted to our new situation, we began to realize some of the benefits, such as convenience, cost savings, time efficiencies, and work-life balance. As we emerged from the quarantine and trickled back into the ‘new normal’ daily life, it made sense to keep some of these newfound benefits and integrate them into our pre-existing schedules and routines.
And that is how we embraced the adoption of the single force driving the explosion in industrial real estate demand.
The Explosion of E-Commerce
What was once just a niche space to purchase books and bid on used or collectible items has turned into “instantly-buy-anything-and-have-it-delivered-to-your-door-tomorrow-with-one-click.”
And despite the amazing customer service, rock-bottom prices, the endless selection, and convenience factor found online, many of us still held on to our past habits of shopping in-person; whether it be to see or feel the product, for the experience, or for social reasons.
That all changed with the pandemic and stay-at-home orders across the globe.
According to McKinsey, e-commerce penetration in the United States saw 10 years’ worth of growth (from roughly 16% to 33%) during the first 3 months of the shutdowns. And according to newly released statistics from TechCrunch and referencing IBM’s U.S. Retail Index, the pandemic has accelerated the shift away from physical stores to digital shopping by roughly five years.
And when you take a closer look, the numbers are staggering…
According to Retail Insider and referencing a StatsCan report, e-commerce sales reached a record $3.9 billion in May 2020 in Canada, which is a 2.3 % increase over the previous month and a 99.3 % increase from February 2020.
Year-over-year, looking back to May 2019, online retail sales more than doubled; increasing by 110.8%.
On the flipside, total retail sales plummeted to $33.9 billion in April 2020, representing a 29.1 % decline from February 2020 and a 26.4 % decline from April 2019. During that same period, e-commerce saw a 63.8 % monthly increase, as in-store sales dropped 25.3 %.
Overall, whether we look at the data or examine our own personal experiences during those challenging times, many of us would agree that we turned to e-commerce platforms for many of our non-essential needs. Essential providers, such as grocery stores or wholesalers like Costco and Walmart were typically busy each and every day.
This begs the question…
Aside from the obvious answer that many non-essential retailers were forced to close…
Why did so many of us choose to purchase essential goods in-person instead of online?
Was it because food delivery platforms and supply chains were not robust or mature enough? Or didn’t have competitive variety and pricing?
Or was it because we prefer to buy those items in-store?
Whatever the answer, it appears as though the former will not be an excuse for much longer.
Industrial is the new Retail….
With a proven pool of consumers and vastly untapped potential, the race towards omni-channel retail and supply chains has become a cultural phenomenon. Amazon is/was (depending on when you read this) the most valuable company in the world, largely driving value from its massive scale, its technology, and its ability to gobble up entire industries at will. And WalMart, its rival, and at one-time the market leader, isn’t going down without a fight.
As the behemoths battle for market share, each brings different competitive advantages. Amazon is a tech giant with unfathomable amounts of data on its consumers and a whole host of industry verticals, all integrated together to create synergies and economies of scale.
WalMart, the grizzled veteran, possesses decades and decades of experience and the ingrained relationships and influence with vendors, manufacturers, governments, and suppliers across the globe that come with it.
Differences aside, both recognize and see the value in fulfillment and last-mile strategies.
Amazon’s strategy has been to establish large fulfillment centres around the periphery while building a last-mile facility network throughout urban neighbourhoods as close to consumers as possible.
In fact, according to Bloomberg, Amazon plans to put 1,000 (and eventually 1,500) warehouses in suburban neighbourhoods around the United States and Canada and have their own integrated network to compete with WalMart on same-day deliveries. The announcement was made, in part, as Amazon failed to fulfill its two-day delivery guarantee during the lockdown, despite the hiring of over 175,000 new workers. The bold splash comes in preparation for the 2020 holiday season and beyond.
And WalMart, the dinosaur turned e-commerce professional, carries a network of stores it ingeniously converted into last-mile facilities; whether it be for deliveries or in-store pickup. Further, it’s made a multi-billion-dollar commitment to cutting-edge technologies that would make even Jeff Bezos worried, or at least, a tad bit jealous.
In the not-so-distant future, we can expect all of the big players in the warehousing, distribution, and logistics space to have these mini-shipping centres scattered throughout municipalities and neighbourhoods – both urban and suburban, ready to deliver goods to consumers.
Once strategic positioning and locations have been obtained by all Parties then the war will rage on inside the four walls of each of these fulfillment and distribution centres.
The competitive advantages will then lie in: efficiencies derived from robotics, racking, Internet-of-Things sensors, data networks, blockchain, electronic shelves, AI software for predictive supply chains, and automated manufacturing and distribution.
While those innovations continue to be dreamed of, built, and made ready, we are just scratching the surface as it relates to building and occupying the ideal industrial facilities.
And when considering the Greater Toronto and Hamilton Area’s Industrial real estate market, one would wonder where and how and when these companies could secure the amount of space that is being projected will be needed to meet rising demand and changing consumer behaviours.
So What’s Next?
Up until now, we have identified the lead dominos in the tangled love story that industrial and e-commerce have become.
Online sales drive continued demand for space while more extensive warehousing and distribution networks drive faster deliveries and higher customer satisfaction rates, creating the flywheel effect that Amazon founder Jeff Bezos is famous for coining.
With that said, let’s continue the conversation by examining exactly how these events have impacted the GTHA’s industrial real estate market, with key analysis regarding last-mile/last-touch facilities, fulfillment centres, and cold-storage facilities… three of the most sought-after property types in 2020.
The Impact on the GTHA Industrial Real Estate Market
As these companies focus their attention on formally setting up their operations and finding (or building) space suitable for their needs, they will and already are influencing the entirety of the commercial real estate market.
The scale is so grand, and the potential payoff so large, that any one of these players can eat up substantial amounts of incoming product pipeline.
The result of this means that, if you’re actively looking to set up a fully-customized, state-of-the-art facility (as these businesses are) then your best bet is to pre-lease in advance with a reputable developer partner, to develop from the ground up (if you can find land), or to find a facility built on-speculation and secure it appropriately.
Overall, the impact on the GTHA Industrial real estate market has been tremendous… including the demand for three (3) key types of industrial facilities which we will explore below.
Fulfillment Centres
So what are fulfillment centres? These are larger industrial facilities. A key distinction: warehouses are historically viewed and used as long-term storage solutions, while fulfillment centres offer temporary storage that will soon go out for delivery to customers.
Due to their appetite for space and limited availabilities within the City core, fulfillment centres are typically located on the periphery. The strategy for most businesses is to integrate these fulfillment centres into their overall network through last-mile distribution centres.
Amazon’s Fulfilment Centres in the GTHA:
1. 6351 Steeles Ave. East, Scarborough, Ontario – 1,023,000 ft²
Amazon recently opened a new fulfillment centre at 6351 Steeles Ave. East in Scarborough in August 2020; its first in the City of Toronto (not including the surrounding GTA regions).
2. Salem Road & Rossland Road, Ajax, Ontario – 1,100,000 ft²
Crestpoint, along with Blackwood as a partner, announced the execution of a lease with Amazon in Ajax for a 1.1 million ft², Class A industrial building with 40’ clear height, 110 truck-level doors, and 195 trailer parking spots on 58 acres of land.
The project is situated on the northern 58 acres of Crestpoint’s GTA East Industrial Park, which spans 107 acres of shovel-ready, industrial-zoned land. The southern parcel of the GTA East Industrial Park is in for final approval on three state-of-the-art industrial buildings totalling over 900,000 ft², with the option of a build-to-suit for one building of up to 1.0 million ft².
3. Amazon – Hamilton, Ontario – 855,000 ft²
Per the City of Hamilton’s press release, “Amazon Canada’s plans include a new 855,000 ft² fulfillment centre to be located in Mount Hope adjacent to John C. Munro Hamilton International Airport. Employees at this location will work alongside Amazon Robotics to pick, pack, and ship small items to customers such as books, electronics, and toys.”
It also added that “a new 50,000 ft² delivery station in Stoney Creek will power the last mile of Amazon’s order fulfillment process. Packages are transported to these delivery stations from Amazon fulfillment and sortation centres, and then loaded into vehicles for delivery to customers.”
Once the centres are operating, they’ll bring the number of Amazon fulfillment centres in Ontario to 10, with six more spread across Canada.
Last-Mile/Last-Touch Facilities
The “last-mile” refers to the final step of the delivery process from a fulfillment centre to the end-user. Last-mile – or last-touch – distribution centres are typically located closer to the City core or even in suburban neighbourhoods. They put the delivered goods in range from a few yards to 50 kilometres of its end destination.
On the surface, these centres may not seem important but this ‘last mile’ can make up to 28% of a shipment’s total cost. Because of this, e-commerce, transportation, and logistics companies are looking to deliver more product in both a faster timeline and in a more cost-effective manner. We are seeing this develop in real-time with companies such as Amazon, who just announced its intention to put 1,000 warehouses in suburban neighbourhoods across the United States.
When it comes to establishing last-mile facilities in the GTHA, the issue typically revolves around land… and the lack of it, as we will touch on later. That being said, developers have been willing to purchase older buildings to redevelop while maintaining certain elements and architectural features; especially for historic properties. Those investments have been worth the price purely to secure the right strategic location in proximity to urban neighbourhoods.
Amazon’s Last-Mile Facility Announcements:
Amazon has announced its intention to open a number of new delivery stations throughout Southern Ontario in the coming year, some of which are named below.
- Scarborough
- 400 Nugget Avenue – 650,000 ft² – 2021
- 75 Venture Avenue – 295,000 ft² – 2020
- Vaughan
- 50 & 51 Keyes Road – 193,000 ft² – 2021
- 200 Tesma Avenue – 209,000 ft² – 2020
- Etobicoke
- Stoney Creek
- Kitchener
- Whitby
- 1555 Wentworth Street – 350,000 ft² – 2020
Urban Redevelopment (Suitable for Last-Mile Distribution)
QuadReal – 60 Birmingham Street – Etobicoke – 400,000 ft²
QuadReal Property Group is set to redevelop the old multi-storey Campbell’s Soup factory in Etobicoke. The project will include three one-storey industrial warehouses totalling 400,000 ft² that will replace eight small industrial buildings while preserving some of the original facades.
According to UrbanToronto coverage, “a total of 86 loading dock spaces are proposed as part of the redevelopment to support typical warehouse distribution operations. As such, both truck level and drive-in door spaces are spread across each structure, yet strategically located in central locations so as to minimize views and excessive noise from the abutting residential neighbourhood streets.”
It is expected that the businesses that will occupy these buildings will be in the warehousing, distribution, or e-commerce industries. Further, it should be no surprise to see Tenants flock to it given its proximity to a high-density population; with downtown Toronto accessible through nearby Lake Shore Boulevard.
Cold-Storage (and Grocery) Distribution Centres
Cold-storage distribution centres are a specialty type of fulfillment centre that are, in some respects, a hybrid between fulfillment centres and last-mile distribution centres. They are typically located on the fringes of or just outside the Core and in close proximity to transportation routes. There, they have greater accessibility to space for larger footprints but are also well positioned to make same-day deliveries.
Because of the cost associated with storing and shipping groceries, as well as the perishable nature of said goods, it is critical that these centres are located as close to consumers as possible. Groceries used to be a very small percentage of online retail sales, however, they have increased exponentially since the pandemic. We have seen this trend play out in real-time. Specifically, WalMart made a multi-billion-dollar commitment to its cutting-edge operations in Canada.
Furthermore, American-behemoth Lineage Logistics recently acquired Ontario Refrigerated Services and raised $2.11 Billion in funding from prestigious partners such as Oxford, Bentall GreenOak, OPTrust, and Morgan Stanley in its bid to buy its way north of the border.
WalMart – 11110 Jane Street – Vaughan – 550,000 ft²
WalMart has committed to “developing a supply chain that is the envy of the world,” part of which includes its fifth distribution centre in the Greater Toronto Area that will also bring “hundreds of Canadian construction jobs along the way.”
The “next-generation 550,000 ft² distribution centre at 11110 Jane Street (400 Highway and Teston Road) [is] slated to open in 2024” and will leverage “automation and technology working with Dutch automation company Vanderlande.”
The facility will be a cold-storage, fully-automated, warehousing, and distribution facility used for ambient general merchandise and food products.
The balance of WalMart Canada’s $3.5 Billion investment package will go towards:
– “Omni-capable” warehouse management systems,
– “smarter stores” with robotics, cameras, and electronic shelves,
– telematics and IoT sensors,
– AI software for predictive supply chains, and its
– blockchain transportation payments platform.
Sobey’s – 100 Gibraltar Road – Vaughan – 250,000 ft²
Sobey’s launched its new 250,000 ft² distribution centre in Vaughan as part of its $2.1 billion plan to revamp stores and expand its e-commerce offering.
Not only will they look to spur technological innovation with their Ocado partnership, but they’ll try to do what most grocery delivery services are struggling to achieve… getting the order right.
Grocery stores remained packed throughout the pandemic despite the ability to order online. State-of-the-art industrial facilities and robotics technologies may boost consumer confidence to the point where we choose to forgo the packed lots and long lines.
According to a York Region release, the new centre is “a huge hive of 250,000 totes carrying 39,000 of different products, which is the most in the world. On top of our huge hive are our robots running around picking around and optimizing.”
All of this activity in the GTHA Industrial real estate market can only be described with one word: amazing.
It’s amazing that we live and operate in an area and an asset class with so much promise and optimism.
However, that being said, there is one key headwind that may alter the strategies that investors, developers, landlords, and tenants choose to adopt in the coming years and decade.
They Don’t Make It Anymore
Overall, as the pandemic became a story about the movement of goods, so has the rise of e-commerce become a mirror for the race to find and develop physical land.
There are so many intelligent, well-staffed, well-funded, and capable developers and investors overseeing development projects in the GTHA. Yet, if you do not have the land upon which to develop, then it’s all for naught, or at least, it becomes a major roadblock.
The silver lining here is that, despite these constraints, everyone is in the same boat.
So here is how we believe things may play out.
Firstly, land will continue to be bought and sold. If you find an opportunity to purchase industrial land that is shovel-ready and in a great location, and you are a developer, then you would likely consider doing so. Not only are there shortages of the land itself, but delays in the zoning, planning, and servicing processes, so plan ahead and consult with the right people. The bottom line here is that pricing can get expensive if you’re in a pinch and need to buy, however, the pricing will continue to increase regardless of any of those facts.
And secondly, both as a result of the land shortage and the move to find infill distribution sites within the City’s core, we do see and will see more redevelopment of older industrial buildings that typically have lower clear heights or poor shipping capabilities. These make for excellent opportunities and often come down to a Tenant’s needs, timelines, and financial situation.
Overall, e-commerce has changed the industrial asset class for good. What was once the least glamorous asset class has become the ‘darling’ of commercial real estate and a prized asset for any landlord, investor, or developer.
If you require any assistance regarding your commercial real estate property or portfolio, please contact us.
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