Intensity and endurance have a simple but balanced relationship. Demand too much of one and the other will suffer. However, it is so in order that we return to a state of equilibrium; as nothing, or no one can charge forward, unrelenting, forever.

The saying to “burn the candle at both ends” exhibits this phenomenon perfectly.

Typically, we view this in the context of hard work and sleepless nights. Yet, this concept too exists when speaking of business, and markets, and economies.

Over the past decade, the Greater Toronto industrial market has raged on, becoming a shining example to its counterparts across the world. Market forces have absorbed almost all availabilities, spurred swaths of space to shape, and raised rental rates to record highs.

For those working within the industrial real estate market, business was and is still phenomenal. However, it is no secret that finding, constructing, and securing space has become incredibly difficult. This was to be expected as the low-hanging fruit of developable land and e-commerce demand were gathered.

Now, with whispers of an economic downturn, coupled with rising interest rates and inflated material, labour, and real estate costs, one must ask the question:

Have we burned the candle at both ends?

Are we at a turning point? Or is this simply a bump in the road to continued success?

While it is impossible to predict outcomes, one should note that costs are themselves, too, squeezing stakeholders from both sides. Developers must pay more to borrow and build, forcing rents ever upward to justify the opportunity. As a result, this begs the question if tenants will be able to continue to pay more and more as their input costs soar. Will investors continue to support the delivery of new inventory, or will they re-allocate capital elsewhere with greater yields?

These are just some of the questions and concerns being raised by decision makers looking to formulate a strategy for the coming months and year.

That all said, ingenuity and creativity are the prerequisites to finding solutions when they are not readily apparent. It is this writer’s belief that the market will eventually return to a healthy state, even though opportunities may be more difficult to uncover or riskier to execute.

On that note, for this week’s newsletter, we will dive a bit deeper into industrial construction costs in the Greater Toronto Area, with a focus on various input and material costs.

Industrial Construction Cost Deep Dive

As we explored in our previous newsletter, the true cost of developing an industrial property is a moving target.

Along with all of the various components that go along with such an undertaking – from labour and materials, to site servicing, land costs, taxes, and professional fees – each of the constituent parts is continually changing and evolving as the economy and supply chain bring uncertainty.

Furthermore, cost guides are just that – guidelines – and are done to provide a rough estimate. They are prepared with many assumptions in mind, and do not accurately reflect highly-custom specifications; which can have a dramatic impact on the final cost.

The point is, each project is different, and circumstances evolve as each project unfolds. With that said, let us examine the constituent costs associated with industrial development.

The Turner Construction Company is a well-respected firm and known for its Building Cost Index, which analyzes a broad range of construction inputs and factors.

According to their most recent report: 

• the North-American-wide Building Cost Index increased 2.23% quarter-over-quarter and 8.09% year-over-year in Q2 2022.
• the Industrial Product Price Index increased 14.3% year-over-year, led by an 82.8% annual increase in energy costs, and a 24% yearly increase in metal products and construction materials. The sole exception has been a 27.7% annual decrease in the cost of lumber and wood products.
• The per-unit labour cost has increased 9.5% in the past 12 months, while industrial construction costs across Canada have increased, on average, 15.7% year-over-year.
• Industrial building permits across Canada have gone up by 53.59% since Q2 2021, with non-residential permits in Ontario increasing by 28.74% in the same period.
• At the same time, pricing for concrete, steel, glass, drywall, elevators, mechanical, and electrical have all gone up, due largely to material input prices and wages.

Summary of Component Costs, Scarcity, and Lead Times

Bottlenecks: Curtainwall and glass; drywall and steel studs; HVAC & electrical equipment; fasteners; transportation and shipping costs. All of the aforementioned components are either seeing significant price hikes or increased lead times due to demand and/or labour issues.

Stabilizing: Steel, joists, deck, and rebar; roofing; doors, frames, and hardware; cement; chemicals. These components are either seeing moderate price increases or improving lead times.

Canadian Industrial Product Price Index