Oil and gas prices will continue to drive economic growth in SK and AB through 2024, according to the Conference Board. Saskatchewan will also benefit from higher prices for commodities such as wheat and potash.
Saskatchewan is reported to lead our country in 2022 with a growth of 7.6 per cent.
However, we’re experiencing inflation at a rate we’ve not seen in the past 15 years.
The cost of construction and land has been rising.
There is a shortage of labour which is putting pressure on construction wages.
The logical conclusion is that the cost to lease industrial real estate will likely break through to a new high in the months ahead.
Whereas the current average rental rate according to our 2Q22 Industrial Market Survey is $11.82 PSF, we know that a developer needs to see a $13.50 PSF net effective rate on shell space to justify building new warehouse today.
Let’s look back in time
There was a 20-year period before 2005 in which warehouse rental rates flatlined.
I know of one example where a Saskatoon industrial tenant renewed their lease for four five-year periods at $4.50 PSF net.
They may have been a bit on the high and sometimes on the low side, but their rate did not move over 20 years.
The fact our net effective industrial rates have been bouncing around in the same territory for almost ten years is fascinating.
Between 2007 and 2012, the average rate jumped from $5.62 PSF to $11.21 PSF.
That’s very close to a 100 per cent increase in seven years. Could it happen again?
If you put seven different economists in a room and asked that question, you will get seven different answers.
Economies of scale matter
When quoting average rates, it’s important to mention that there can be a considerable difference in price between 2,000 SF and 200,000 SF.
There are significant economies of scale in construction costs that must be factored in.
Amount of spec building will influence the future
If you came to me today and wanted to lease a new warehouse, it would take one full year to complete the project due to labour and supply chain issues.
ICR’s 2Q22 market analysis reports an average vacancy of 2.52 per cent.
It worsens if you isolate that statistic to the Marquis area (our main industrial area in Saskatoon), where the current vacancy is just 1.83 per cent.
If we do not see more spec building, the resulting supply/demand factor will affect those rates in a way we’ve not seen for over ten years.
It’s going to be very interesting to see where the line on this graph moves to in the next five years!