September 20th, 2024
“For every action, there is an equal and opposite reaction.”
- Isaac Newton
When riding a wave at its peak, few seldom stop to think about the next sequence of events as it inevitably comes down.
This doesn’t mean that every bull run is followed by a crash.
That said, humans are known for their over-indulgence in both optimistic and pessimistic scenarios; the former manifesting as the largest industrial pipeline in the GTA’s history while the latter took form as enormous overflow and stockpiles following the pandemic.
As we work through supply-side shocks and integrate new technologies, businesses change. And these changes are reflected ultimately in the real estate footprint underlying the operation.
This has led us to a point where the GTA industrial market just saw the highest industrial vacancy rate in a decade, with the largest quarterly negative absorption in 14 years, and the first average rent decline in 8 years.
Heading into the tail-end of 2024, we expect a flurry of transactions as tenants weigh their options, look to re-organize and enhance their spaces, as well as to take advantage of more moderate pricing.
We also forecast the changing landscape and shift towards the on-shoring of manufacturing to result in a strong demand for heavy power facilities and design-build opportunities. General industrial users and logistics and warehousing tenants will continue to purchase and lease, albeit at reasonable levels relative to the recent boom.
That is why, for this week’s newsletter, we will continue our look into heavy power and its impact on industrial real estate.
Empowering Growth: Just Where Does Power Even Come From?
One of the best ways to reverse engineer something is to break it up into its constituent parts while observing the relationships between them. Typically, we perform this exercise when something breaks.
To that end, the simplest and most informative graphic we were able to obtain regarding the power grid depicts what happens when homes and businesses within the City of Toronto lose power.
Loss of power supply explained. Source: Toronto Hydro.
According to Toronto Hydro: “There are three main components to Ontario’s electricity system — generation, transmission and distribution. Once electricity is generated by organizations such as Ontario Power Generation, it’s delivered through transmission lines that serve as a highway for transmitting electricity. Hydro One then supplies electricity to Toronto Hydro through their transmission lines. Toronto Hydro is responsible for the last step of the journey; distributing electricity to residential, industrial and commercial customers.”
“A loss of supply occurs when Hydro One is experiencing issues with its power supply and is unable to supply us with electricity. When this occurs, we’re unable to deliver electricity to our customers until Hydro One makes repairs.”
Although the above case discusses general power generation, transmission, and distribution, the process of supplying industrial facilities is largely the same, just on a different scale and with different equipment. And it involves interconnection going downstream from the original provider to the end user.
Furthermore, depending on where the site in question is located, there may be different municipalities, regions, and/or organizations involved in the process, such as the IESO and Alectra Incorporated (Enersource, Horizon, and Powerstream; to name just a few of its subsidiaries serving the Golden Horseshoe Region).
This begs a few initial questions when seeking out additional power:
- Can OPG – or the power grid as a whole – supply the necessary power to my facility given the draw from neighbouring facilities/homes/etc. without tapping out the grid itself?
- Are the transmission lines physically capable of running the required power to our site?
- Are the distribution lines, fuses/switches, poles, cables, and/or transformers capable of delivering adequate power to the facility?
Source: Toronto Hydro.
Plugged In: Connecting Power to an Industrial Facility
The process of bringing heavy power to industrial buildings in the Greater Toronto Area (GTA) can be onerous and time-consuming, with significant costs depending on the complexity of the project and the overall power requirements.
Below is a very loose breakdown of the process and associated cost estimates, which may – and likely will – differ on a project-by-project basis, but which are outlined for general informational purposes and for the sake of discussion.
1. Initial Load Assessment and Planning
Before installation, a load-flow study is conducted to assess the building’s power needs. This step is critical to determining the capacity required and the type of transformers and switchgear necessary for the building. Depending on the power demands of the facility (e.g., large manufacturing plants or data centers), the study can cost between $10,000 and $20,000, depending on the complexity of the analysis.
2. Coordination with Utility Providers
The next step involves working with utility providers, such as Toronto Hydro, to assess the existing infrastructure. If the local grid supports the needed capacity, the process is straightforward. However, if upgrades are required to the utility’s infrastructure (e.g., transformer or substation upgrades), this can add significantly to the cost. Utility fees for connecting industrial buildings range from $50,000 to $200,000, depending on the upgrades required and the size of the building.
3. Transformer and Switchgear Installation
For high-powered industrial buildings, transformers step down the high voltage from the grid to usable levels. This can involve installing multiple transformers depending on the building’s needs. Typical installation costs for transformers range from $50,000 to $100,000 per unit, with switchgear installation adding another $30,000 to $50,000. Costs increase for larger buildings requiring more transformers or sophisticated systems.
Source: Toronto Hydro.
4. Wiring and Electrical Panel Upgrades
The internal distribution of power involves upgrading wiring and installing heavy-duty electrical panels, which can cost around $20,000 to $50,000, depending on the size of the facility and the amount of power being distributed throughout the building. This step also includes ensuring compliance with local building codes and safety standards, which might add to the cost.
5. Permitting and Labor Costs
Permitting fees can vary based on the size of the project, ranging from $5,000 to $10,000. Additionally, labor costs for the installation of heavy power systems, including electricians and project managers, typically add $100,000 to $200,000 to the overall cost, depending on the complexity of the job and duration of the project.
6. Total Estimated Costs
For a typical industrial building in the GTA, the total cost to install heavy power can range from $250,000 to $1 million or more, depending on the size, load requirements, and necessary upgrades to the local grid. These estimates include equipment, labor, permitting, and utility fees. Costs can be significantly higher if major infrastructure upgrades (e.g., new substations) are required to support the building’s power needs. The process is managed by industrial electricians and contractors who specialize in large-scale electrical installations, with a focus on safety, compliance, and reliability.
7. Timeline
The timeline for bringing heavy power to a new or renovated industrial building can vary significantly. A straightforward connection to the existing grid might take 6-12 months, including planning, permitting, and construction. However, if grid upgrades or new substations are needed, it could take up to two years. This process requires careful coordination between building developers, engineers, and the local utility company.
Conclusion:
Overall, bringing heavy power to a site or upgrading an existing facility can be extremely expensive and time-consuming, and requires the help of a professional electrician, contractor, and/or consultant to navigate the planning, permitting, and installation process. For more specific questions, please speak to the appropriate professionals.
As a continuation from our first issue of this series, there has been a shift back to reality with respect to logistics and warehousing leasing and speculative development. No – this industry vertical is not going away, it is simply counterbalancing following the enormous growth of the past several years.
In the meantime, businesses are looking to nearshore their manufacturing, processing, and packaging operations just as all industrial users are exploring ways to enhance productivity and leverage automated systems. Finally, the rise of AI and quantum computing means a need for semiconductors and data centers. All of these translate into a need for heavy power capacity.
Just as high-clear warehouses draw a premium on rents due to their ability to better-service warehousers through racking and cubic volumes, so too may heavy power facilities command higher prices, particularly due to the time and cost required to bring said power to an industrial property.
Next week, we will take a closer look at exactly what that process looks like and continue our profile of manufacturing, ‘heavy power warehouses’ and the rise of new industry verticals such as data centers and their influence on the Greater Toronto industrial real estate market.
For a confidential consultation or a complimentary opinion of value of your property please give us a call.
Until next week…
Goran Brelih and his team have been servicing Investors and Occupiers of Industrial properties in Toronto Central and Toronto North markets for the past 30 years.
Goran Brelih is an Executive Vice President for Cushman & Wakefield ULC in the Greater Toronto Area.
Over the past 30 years, he has been involved in the lease or sale of approximately 25.7 million square feet of industrial space, valued in excess of $1.6 billion dollars while averaging between 40 and 50 transactions per year and achieving the highest level of sales, from the President’s Round Table to Top Ten in GTA and the National Top Ten.
Specialties:
Industrial Real Estate Sales and Leasing, Investment Sales, Design-Build and Land Development
About Cushman & Wakefield ULC.
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 53,000 employees in 400 offices and 60 countries.
In 2020, the firm had revenue of $7.8 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com.
For more information on GTA Industrial Real Estate Market or to discuss how they can assist you with your real estate needs please contact Goran at 416-756-5456, email at goran.brelih@cushwake.com, or visit www.goranbrelih.com.
Connect with Me Here! – Goran Brelih’s Linkedin Profile: https://ca.linkedin.com/in/goranbrelih
Goran Brelih, SIOR
Executive Vice President, Broker
Cushman & Wakefield ULC, Brokerage.
www.cushmanwakefield.com
Office: 416-756-5456
Mobile: 416-458-4264
Mail: goran.brelih@cushwake.com
Website: www.goranbrelih.com
