Excerpts from BMO ReportCanadian Industrial CRE: Focusing On The Next Growth Markets
Canadian Industrial CRE: Focusing On The Next Growth Markets
During the pandemic, the strong performance of the Canadian industrial CRE sector has been underpinned by multiple structural drivers – e-commerce, supply chain strategies, and a change in customer preferences. We expect these drivers will persist post pandemic. As Tier I markets continue to tighten and effectively run out of space, investors and landlords have begun to focus on new markets. We believe that the basis of this focus is on population growth and migration patterns (the demand driver least discussed in our view), which is expected to set the narrative in the search for the next industrial growth markets.
Why This Report?
We have often been questioned on the strength of the growth runway for the Canadian industrial REITs in our coverage, and there continues to be areas of concern surrounding the sustainability of it among the investor base. Based on our analysis and feedback from the CRE broker community, we note that the industrial REITs in our coverage are actively looking to capture the existing growth runway and focus on their portfolio growth in a strategic manner. We have identified the next growth markets, which we believe, will set the narrative for the Canadian industrial CRE sector and will allow the industrial REITs in our coverage to allay investor concerns.
Proprietary Takeaways
Running Out Of Space: Record low availability rates, minimal supply growth, and increasing rental rates across Tier I markets have led tenants to look for alternative markets.
Populating The Supply Chain: Given the importance of Tier I industrial markets in the supply chain, industrial developers and investors are beginning to track population growth in the next industrial markets and are positioning their portfolios to gain a first-movers advantage.
Increased Focus On New Markets: Landlords, tenants and investors are focused on the next growth industrial markets – Brantford, Hamilton, Kitchener Waterloo Cambridge (Ontario), Montreal (Quebec) and Calgary (Alberta) – amid tightening supply pipelines in Tier I markets.
Companies Impacted
We see Nexus REIT (Restricted) and Summit Industrial Income REIT (See our note) as leaders of the pack within Canada, which have begun to deploy capital and are constantly circling new industrial markets.
As most industrial markets continue to get tighter, the focus is beginning to shift towards the next industrial growth markets. Based on our conversations with CRE brokers, there has been a notable increase in focus among industrial landlords on newer industrial markets outside of the current red-hot major markets, as rents increase, availability rates tighten, and the population continues to grow. According to CBRE, for all intents and purposes, Tier I markets such as Toronto and Vancouver, and to an extent, Montreal, have run out of space, leaving occupiers with no near term solutions.
While Tier I industrial markets such as Toronto and Vancouver are expected to further grow in population size, these markets continue to witness all-time high rents, unaffordable industrial land pricing, and a lack of industrial assets. Given the importance of Tier I industrial markets in the supply chain, industrial developers and investors are beginning to track population growth in the next tier industrial markets.
Nexus REIT (NXR.UN-TSX, Restricted)
As at Q3/21, Nexus REIT owns and operates a diversified portfolio of 91 commercial properties across Canada with a total GLA of approximately 6.8M sf at the REIT’s ownership (56 industrial properties, 22 retail properties, and 13 office properties). Nexus has been particularly active in acquiring industrial assets, having already acquired $543.7M of assets thus far in 2021. Additionally, NXR.UN currently has eight industrial properties across Canada under contract for acquisition, totaling ~1.43M sf for $239.1M. Proforma ongoing acquisitions under negotiation, management expects industrial will represent ~80% of the REIT’s NOI.
Given the favorable industrial tailwinds in Canada and the tightness of red-hot industrial markets such as the GTA, GVA, and GMA, Nexus intends to further expand its industrial portfolio via acquisitions in the secondary markets surrounding these three major cities. Management noted on the Q3/21 earnings call that, in Ontario, the REIT will focus on the acquisition opportunities in Southwestern Ontario, KitchenerWaterloo Region, Hamilton; as well as Montreal and Calgary–Edmonton Corridor. Year to date, Nexus has completed or is in active negotiations for eight transactions in London, Montreal, Calgary, and Edmonton. As the overall pricing environment continues to skyrocket in the GTA, GVA, and GMA, Nexus’s market positioning just outside of these markets and in Alberta should be a long-term strategic advantage.