‘It’s all about beds and sheds’: How e-commerce is fuelling a real estate revolution
Real estate has always been a mainstay in investment portfolios, but the rise of e-commerce and increasing urban population densities have put two classes of buildings squarely in investors’ crosshairs in recent years.
“As the industry likes to say, it’s all about beds and sheds,” said Frank Magliocco, national real estate leader at PwC Canada in Toronto.
Beds refers to residential builds needed to meet the increasing density in urban centres. Sheds, on the other hand, refers to the warehousing/fulfillment market on the industrial side. It is the latter sector that has really been on a roll.
“Fulfillment warehousing space is definitely at the top of investors’ minds,” Magliocco said. “It’s a direct result of the increasing penetration of e-commerce sales. Because of that ride, there’s a massive demand for fulfillment space that will grow even more in the near future. It’s as simple as that.”
It’s a trend that still has long-term potential as an investment, given that e-commerce penetration today represents only nine per cent of retail sales in Canada. “It’s easy to say e-commerce will continue to have a pretty big impact on industrial space,” Magliocco said.
Gil Gordon, a senior vice president with Cushman & Wakefield in Toronto, agrees, noting that e-commerce is causing enormous disruption in the real estate space, especially as it relates to the “final mile” of fulfillment, a term referring to the last stages of delivering goods right to a customer’s door.
So far, most investors have been eyeing the Greater Toronto Area for opportunities in the sector, but Gordon believes over time their focus will broaden.
“The GTA is the third-largest industrial market in North America with the lowest vacancy rate of 1.3 per cent,” he said. “That’s staggering, but gives you an idea of what is happening in the sector.”
Gordon likens the warehousing and fulfillment phenomenon to a big balloon: as bricks-and-mortar retail footprint shrinks, the industrial side grows. “Squeeze one side and the other expands,” he said.
New warehousing and fulfillment projects are increasingly making headlines. In Ontario alone, Amazon has announced plans to build a new fulfillment centre in Scarborough (its 12th in Canada); DSV Canada has a 1.1 million sq. ft. centre in the works in Milton; and an 850,000 sq. ft. UPS Canada facility is under construction in Caledon.
“The sheer size and scale of these projects is huge,” said Kyle Hanna, an executive vice president at CBRE in Toronto. “Most are talking one million square feet or more.”
It’s a square box that requires less capital and can be reused which can translate into billions of dollars
Kyle Hanna, an executive vice president at CBRE
And the warehousing boom goes beyond megaprojects. While massive regional fulfillment centres that act as hubs for a larger geographical area get a lot of the attention, Hanna said now he is seeing the trend shift to smaller, more urban locations to satisfy last-mile needs.
The fulfillment landscape is becoming so large and complex that some facilities are being designed to handle specific functions, such as only returns, or food and beverage inventory for multi-function retailers such as Walmart.
As for investors, one major appeal of the warehouse sector is the considerably lower development costs versus retail and office real estate. “It’s a square box that requires less capital and can be reused which can translate into billions of dollars,” Hanna said.
That could explain why the development project numbers keep growing.
“It used to be that the number of transactions for large-size industrial deals was one every few years,” he said. “Now it’s not uncommon to see up to five builds in a year. We can expect even more very compelling announcements in the months to come.”