Market Observations

By Phillip Moore

After years of working in the ICI sector of organized real estate I’ve been able to forecast, pretty accurately, how my year is going to turn out based on the number of good quality leads I receive between January 15th to April 15th.  It’s a small window but those 3 months will usually dictate my sales volume for the year. 

March was an interesting month.  Typically, I’m swamped at this time.  And while I’ve kept myself busy it’s not the same as in past years.  I found myself cold calling this month, when in past years, March has typically been a month where leads are plentiful and flow in.  There are obviously many benefits to cold calling albeit, it is my least favorite task.  I was able to connect with a number of different potential customers in many different sectors and I heard the same thing from almost everyone; people are nervous as there is uncertainty on the horizon

I’m not an economist nor do I claim to be.  I am not writing this blog to evoke fear or spin a tale of a pending correction.  What I am writing about are my personal observations this past month.  And here is what I noticed.

I spoke to a colleague of mine who is what I consider to be one of the best Residential Realtors in Barrie.  He told me that the average new listing price of a home in Barrie at the beginning of the year was approx. $899,000.  He told me the average new listing price in Barrie for a home was $749,000 in the month of March. 

I spoke to a new Tenant who I just placed in the Tile business from Toronto (who sells a lot of wholesale products to developers) and he said he was nervous because he had noticed a slowdown.

I spoke to a client in the Transportation/Logistics sector who told me shipping costs are at an all-time high and he was the busiest he’s ever been.  A normal full trailer load (FTL) bound from Toronto to Calgary was previously $4500 now costs $16,000-$18,000.  There are several reasons for the increased shipping costs, fuel being the obvious one but that doesn’t account for it all.  The flooding in British Colombia 3-4 months ago washed out much of the infrastructure for shipping across Canada which is another contributing factor and of course, the supply chain crisis is all exacerbating the problem.  These costs have to be passed on to someone who is typically the end consumer which leads to inflation.

I was speaking with a colleague of mine who does Fire Protection Engineering and Sales. He told me his steel costs for sprinkler pipes went up 47% in one week in March! He had to cancel several million dollars in POs or lose money.
I was speaking to the Economic Development officer for Bradford/West Gwillimbury who told me an industrial condominium development had to be put on hold indefinitely because of severe construction cost increases which trickled down to the selling price (which 50% of the sales were already under contract) changed from approx. $300 SF to $450 SF to $600 SF!! (Please keep in mind this was a smaller development where economies of scale do not come into effect.) The buyers walked away, and the developer has now shelved the development.
I spoke to another colleague of mine in multi-Residential (the hottest asset class in ICI for the past few years). He is selling off approx. 30% of his portfolio as rental rate increases are lagging behind acquisition prices. The name of the game is to buy low and sell high but because cap rates are now so compressed you have to buy high and scramble to increase your rental rates to get a decent return on investment. If you fail to achieve those increased rental rates, then you can get yourself into some hot water. Investors have business models, and they are not some whimsical charts; they must achieve their projections or else!
I spoke to my brother who works in the corrugated box industry. Box sales have been at an all-time record-breaking sale high fueled in large part by the pandemic, because everyone is purchasing online. And everything online comes in a box. He told me that for the first time in 18 months boxes sales have slowed. Believe it or not, boxes are considered by economists to be a Key Performance Indicator (KPI) of the economy as corrugated box manufacturers are the first in the supply chain to slow down as the customers who are putting their products into those boxes stop placing orders.

And then of course there is Myself. I usually don’t start cold calling until things slow down which usually isn’t until Summer. I’m normally swamped from January 15th to June 15th. Then people start taking vacations, large companies’ capital budgets start to get depleted and those looking to make a move generally want to have their purchases and/or leases tied up (the cycle does that 4 – 6 months) before the weather turns nasty again in late Fall. So having to start cold calling in Mid-March isn’t exactly what I was hoping to be doing. I decided to call on my colleagues to see if perhaps I was an isolated case? My one colleague said “don’t panic” which is good advice, but his comment felt rehearsed as if he had already told others that too. I called another colleague who manages a large portfolio & has his realtor’s license and he acted like the sky was falling and stated he wasn’t accepting any new tenants who were not true industrial. He feels that many of these service-orientated businesses (which are permissible in Light Industrial zones) will be the first to go should we have a recession (gyms, academies, etc.).
End-user Industrial Real Estate prices in Barrie are $300-$400 SF for small to medium-size buildings. In Toronto, they are topping $500 SF mainly being driven by high land prices. It’s $1M acre for Industrial Land in Barrie. It’s $3M an acre in Aurora and $4M an acre in Brampton.
So, what does this all mean? Well first and foremost, I do not have a crystal ball. This could just be a lull in the market. But I did take several Economic courses at The University of Western Ontario. Inflation is bad and it is now being reported at 7%. As costs for things like Steel, Labour, Shipping, Sprinklers, etc. go up, a Buyer/Tenant’s purchasing power goes down especially because we all know that no building is perfect when a Buyer/Tenant first moves in. Not only have they paid an exuberant amount of money to get the building they also, more often than not, have to renovate and these rapidly rising costs are pushing them out of the market.
We know there is uncertainty in the market. We are seeing slowdowns in several business sectors. Average residential prices are slipping in the Barrie area and while that is only based on one month’s information which certainly doesn’t signal a ‘trend’ (technically prices would have to slide for 3 consecutive months to be considered a trend) it’s not headed in a positive direction. And while there is no direct co-relation between Industrial & Residential, I think we can all agree that real estate, in general, has been very bullish for a minimum of 5 years and prices are very high. For all, I know this could just be a blip in the market. Maybe when the sun comes out and the temperatures rise, and this snow goes away things will improve. I know my gratitude for winter finally ending will!! But that might also be wishful thinking. My gut feeling tells me we may have peaked or are in the midst of peaking now in the Greater Barrie Area.
Conclusion: In the words of my colleague, Don’t Panic! We need more market data before we can establish a trend. But with interest rates on the rise (Feds said they are committed to a 25 Basis Point increase for another 5 consecutive quarters), it will have an impact on prices to some scale. The ICI market remains very tight right now. I do not see any cause for alarm but there is nothing wrong with being cautious. At the time that this Blog was written Barrie still only had 4 Industrial buildings for sale of which 3 are under contract. All of Simcoe County only has 10 Industrial buildings for sale. But that’s a contrast to January when there was only 1 Industrial building for sale in Barrie. As supply increases prices will begin to level out. If you’ve been thinking about selling your property now might be the time to consider it seriously. Please give me a call if you’d like to get a free opinion of value and discuss options! That’s my two cents.
Best,

Phillip Moore
Sales Representative
Sutton Group Incentive Realty Inc., Brokerage