Canada is running out of space. And combined with the country’s piping-hot residential and commercial real estate market, it’s putting a strain on Canadian businesses that deal in commodities, such as promotional products. Why? Because demand for warehouse space, as well as the land facilities it sits on, is causing significant increases in purchase prices and rent.

This problem – the residual effects of supply chain woes – is extensive throughout North America. In the U.S., real estate logistics firm Prologis says available industrial space across the country has fallen to 3.4%, an all-time low, particularly in urban markets near ports like Los Angeles and New York City.

Available space is even more scarce in Canada, where the availability rate for industrial buildings to lease is 2.2%, down from 3% in the spring of 2021. The warehouse shortage problem is especially dire in Toronto (Ontario is home to most ASI-listed Canadian suppliers) and Vancouver. According to market intelligence firm Altus Group, it’s fallen to about 1% in those two cities.

That’s posing a challenge for suppliers and distributors that pay rent to house inventory and outsource fulfillment services. Warehouses either have little or no vacancy for stock, while others – many of them older and taking up valuable land – are being removed or renovated in favor of more lucrative developments like mixed-use condo/retail buildings. For example, according to the Toronto Regional Real Estate Board, the average price of a city condo earlier this year was almost $800,000 Canadian dollars.

In addition, the increase in e-commerce demand during the pandemic has spurred a nationwide run on warehousing, causing rents to surge. Amazon, for instance, just bought up nearly 830,000 square feet of additional space in Burnaby, BC, just outside Vancouver, according to investment management company Colliers International, which also reports that in some areas in and around the city, such as Chilliwack, Coquitlam and New Westminster, available space for inventory is at exactly zero.

Physical land is at a premium too, says Sam Singh, president and CEO at Full Line Specialties (asi/199688) in Surrey, BC, near Vancouver. That city and surrounding areas  – second to Toronto in the country in terms of real estate prices – can only expand north; to the south is the U.S. border, to the west is the Pacific Ocean and to the east are mountains. Late last year, significant flooding there caused highway closures for weeks, which has developers thinking twice about expanding into that unfriendly terrain for the time being. Even developing north of the city poses a challenge since there isn’t enough infrastructure there yet to support major industry.

Full Line owns its office and production facility, and also leases three warehouses in the same complex where it houses its fulfillment operations. “Clients want more and more storage and kitting space,” says Singh. “While investors are driving up costs, a perfect storm of supply chain challenges, larger inventory orders and direct importing has been putting pressure on warehouse capability.”

“While investors are driving up costs, a perfect storm of supply chain challenges, larger inventory orders and direct importing has been putting pressure on warehouse capability.” Sam Singh, Full Line Specialties

The real estate market in Canada was booming years before COVID. Despite a few hiccups during recent recessions (such as 2008), prices have been on a steady upward trend for at least 20 years. That has of course attracted investors, which has driven up costs even more. New York-based investment capital company Blackstone has just announced it’s opening an office in Toronto to tap into the market there. Since 2018, the firm has spent over CA$4 billion to buy up warehouses and other industrial real estate in Canada. In fact, the market in Canada is so overvalued that the Organisation for Economic Co-operation and Development (OECD) ranked it as having one of the top three largest real estate bubbles among its nearly 40 member countries. While a hot market is great news for property owners preparing to sell, it’s pricing out hopeful home buyers as well as companies with the need for industrial space, demand that’s increased during the pandemic.

Blackstone is expanding its presence in Canadian real estate by opening an office in Toronto https://t.co/uLjfkwspyt

— Bloomberg (@business) May 9, 2022

Meanwhile, the cost of leasing space in those cities has risen about 40% since 2019. Price increases have been exacerbated by supply chain concerns that have compelled companies to buy and store inventory months ahead of time. Companies are “buying stock not three weeks, not three months, but six months ahead of time and storing it somewhere,” Martin Imbleau, CEO at the Montreal Port Authority, told Bloomberg.

Those companies that own their warehouse and manufacturing facilities are at an advantage in this difficult environment. “We don’t have to store anything off-site,” says John Bresnai, sales manager at A.T. Designs (asi/30239), a custom metal products supplier in Toronto. “Our raw materials are stored on-site and we ship orders as they’re manufactured.”

But it’s a different situation for Anne Joyce, owner of Liberty Clothing Company, a retail and wholesale apparel company in Mississauga, ON, who says her warehousing costs doubled virtually overnight last year. Fortunately, she had the capability to move inventory from a third-party logistics (3PL) facility to the company’s own smaller space, but she and her team have been actively working on reducing stored stock by sourcing locally whenever possible.

“Before COVID, 60% to 70% of our purchases were from overseas,” she says. “Now, we buy that amount from local suppliers. But for those items we’re still getting offshore, we need to be able to receive and store them. It’s a tough market for sure.”

2.2%
the availability rate for industrial buildings to lease across Canada.

(Altus Group)

Scott Hulbert, managing director of ideavation (asi/229801) in Toronto, is in an unenviable position – the city’s Metrolinx public transport system is planning to build a new subway line and has expropriated the land where ideavation’s rented office/warehouse sits. That’s thrown Hulbert into a search for a new office and warehouse after 15 years and fairly consistent rental costs, at a time when facilities are either unavailable or at a high premium.

“I’ve been looking for the better part of the year and I can’t find anything,” says Hulbert. “My commercial real estate agent said industrial vacancy in the GTA [Greater Toronto Area] is 0.8% right now. Smaller-scale space is hard to find, and it’s insane to try to buy.”

“I’ve been looking for the better part of the year and I can’t find anything. Smaller-scale space is hard to find, and it’s insane to try to buy.” Scott Hulbert, ideavation

And now, lease terms run at five or six years at the minimum, says Hulbert, and rent is about 200% to 400% more than what he pays currently. Moving further away from the city isn’t a viable option since freight costs are high and the company ships out program orders on a daily basis. New construction in the GTA is geared toward shiny new condos, not big empty warehouses. “Those that are available for rent are off the market in 24 hours and most are dumps,” says Hulbert.

Even with all this, including record-high energy prices, promo end-buyers – particularly in Ontario where officials just lifted the COVID emergency declaration after 777 days – are ready for a new chapter following the pandemic, though clients remain cautiously optimistic and selective. New Q1 data from ASI shows that distributors across North America increased sales 5.4% compared to Q1 of 2021, marking four consecutive quarters of gains. Still, recovery has been uneven and firms have had to contend with a seemingly endless slew of challenges.

“Clients are looking at how they spend and where they can trim,” says Hulbert. “A certain segment absolutely needs what we offer them; for others, promo is a nice-to-have, or they’re buying gifts at $40 instead of $60. But there’s optimism as events come back. COVID fatigue is real, though I don’t see lead times or costs falling any time soon. Inflation is a real concern. Gas, groceries, housing – everyone’s talking about it.”