People are sensitive to costs.

When a single item becomes more expensive, we take note. Perhaps we substitute the product with a different brand. Or we decide to shop with another vendor or retailer; the story in our head being that something is wrong.

That this was a mistake.

No matter. We will find a replacement of equal quality and similar function somewhere else.

However, when an entire product category increases in cost – such as all lumber tripling in price – we realize that the new cost must be borne by us (assuming we will still need to purchase it). We may do calculations in our head to save in other areas to offset our total expenses. We may simply save less or accept lower profits until pricing – we hope – eventually goes back down to normal. Or, if the market can bear it, we can pass them on to someone else.

This shift in our finances likely won’t be the end of the world. We can manage through creativity, frugality, and perhaps, ingenuity. Buying raw materials and assembling or processing them ourselves. Or procuring larger volumes wholesale to spread out the costs over time.

Whatever strategy or tactic we employ, we’ll be ok.

However, when many line items begin to balloon in cost, we begin to seriously reconsider our approach. In the context of development, this may mean reducing marketing expenses or brokerage commissions. Or it may mean raising rents and valuations; effectively passing these costs down the value chain.

The truth is, costs come in layers. Each layer can be spread out or absorbed over time without much difficulty. As the layers pile on, their effect is multiplicative; squeezing our balance sheet until the venture no longer becomes feasible.

Over the past several weeks and months, we have explored the changes in construction costs, such as materials and labour, and industrial land and property values.

We have also analyzed their impact on the broader industrial market; influencing the supply of new inventory, the acceleration of industrial rents, and the explosion of asset pricing.

For this week’s newsletter, we will dive a bit deeper into the less-talked-about industrial development charges in the Greater Toronto Area. 

Because, when taken together with industrial land values and construction costs, an Investor or Developer can put together a conservative preliminary cost evaluation when considering a potential new project.

GTA Industrial Development Charges

Looking at the table below, we can see the relative total development charges with sample municipalities from each major Region. 

So, what accounts for the large variances in Development Charges between Region?

Well, if we look at what constitutes the total Development Charges, we see that a Developer must pay 1) the Town, 2) the Region, 3) Education charges, and 4) Storm Water charges; depending on which apply. There may also be area-specific charges, such as a charge of 2% of the property value, or other costs per-square-foot, as set out in the by-laws of the Municipality.

Of note, the City of Toronto does not have Town- or Region-specific charges, nor are their Storm Water charges; it only requires Education charges for new developments.

York Region Leading the Way in DCs

York Region has the highest overall DCs, thanks in large part to the $24.41 PSF Region charges. That said, costs have historically been high and the relative increases since 2018 have not been the largest across the GTA.

Peel Region Is Catching Up Quickly…

Peel Region’s DCs are accelerating at the fastest clip with Regional charges that have increased from $13.56 PSF in Q4 2018 to $19.91 PSF in Q3 2022, along with increased charges by each Municipality. 

Halton Region Following Close Behind…

Halton Region has seen noticeable interest as developers move west of the Core. Here, we have seen the bulk of the cost increases coming from the Municipalities, with modest increases in the Regional portion of the total development costs.

Durham Region Increasing But Still a Value Play

Although Durham Region has seen a considerable percentage increase in DCs, the total costs remain well below its regional counterparts. The bulk of the changes stem from an increase in Regional costs from $9.96 PSF in Q4 2018 to $13.30 PSF in Q3 2022 (excluding the Seaton Lands in Pickering) with a small bump from the Municipalities. 

Example: 2022 Development Charges for ‘Big Box’ Industrial Facilities

To cap off our breakdown of development charges across various GTA Regions and Municipalities, let’s look at a ‘quick and easy’ example of what it would cost to develop industrial facilities of 200,000 SF, 500,000 SF, and 1 million SF in Q3 2022.

While this calculation does not account for the differences in industrial land values, as well as the availability of land and other factors in the site selection process, we can see through this lens why an Investor or Developer might favour one submarket over another.