CBRE Halifax White Paper | 1

Industrial lease rates in the Halifax and Dartmouth market are dynamic and dependent on a multitude of factors that include, but are not necessarily limited to:

• location• the physical attributes of a building/site• supply and demand• external factors such macro-economic influences• industry specific events, such as contract losses• law and policy changes• variable commodity prices

All of the aforesaid characteristics have an effect on the desirability of industrial space and, correspondingly, the lease rates that they achieve.

1) Well-located industrial assets along commercial corridors or major arterials within industrial parks will, in general, achieve higher lease rates than those assets on minor collectors, all else equal. This is due, in part, to higher visibility to vehicular traffic, attracting commercial/quasi-retail users that benefit from such exposure. As such, land values along these arterials generally attract a premium rate.

2) Beyond location, many different site specific features can have an influence on lease rates including: length of frontage onto a street; topography and slope; dimensions; availability of parking; yard area and truck marshalling, which all play a role in shaping the overall utility of a multi or single-tenant industrial building.

3) Various physical aspects of an industrial building also impact leases rates to varying degrees, including: building age and quality of construction (concrete, masonry, steel, insulated metal panels); condition of the structural components such as building envelope, roof, foundation, and floor slab thickness; mechanical systems; the existing electrical service; quantity and quality of office space; operating expenses; crane capabilities; availability of dock and grading loading; and warehouse clear heights.

CBRE Halifax White Paper

FEBRUARY 2017

A ‘CLEAR HEIGHT’ ADVANTAGE

CBRE Halifax White Paper | 2

For this report, CBRE has focused on 139 industrial investment properties in the Halifax and Dartmouth market to reveal any obvious trends associated with clear heights; what effect, if any, this specific attribute has on net asking rates; what economic advantages arise when users “look-up” to gain economic efficiencies; and what effect the emergence of e-commerce is having on the industrial landscape.

Firstly, clear heights are typically the measurement taken from the floor to the underside of the roof deck support system, and is dependent on the type of construction, such as open steel web joists, standing seam roof rafters, or wooden ceiling joists. The “clear” represents the usable racking or storage space available

A Clear Height Advantage

Graph1 - Average Clear Height and Average Net Rental Rates

15

1918

21

23

8.36

6.78

7.928.2

8.56

6

6.5

7

7.5

8

8.5

9

12

14

16

18

20

22

24

1960's 1970's 1980's 1990's 2000 +A

vera

ge N

et R

ent P

SF

Ave

rage

Cle

ar H

eigh

t

Decade

Decades - Average Clear Height & Average Net Rental Rates

Average Clear Height Average Base Rent

56”

56”

56”

56”

56”

56”

56”

56”

64”

64”

64”

64”

64”

64”

64”

72”

72”

72”

72”

72”

72”

26’

31’ 4”

36’ 8”

42’

29’4”

35’ 4”

41’ 4”

29’

32’ 8”

39’ 4”

30’

32’

36’

40’

45’

Pallet Height & Clear Height

Source: http://rooflifters.com/roof-raising-why/pallet-stacking-clear-height

to the user.

Since the 1960’s, clear heights in the Halifax and Dartmouth industrial markets have been steadily increasing. In the 1960’s, the average clear height was approximately 15 feet. Buildings constructed during the twenty year period from 1970 to 1990, saw their clear heights rise to an average around 19 feet. The 1990’s experienced an increase in the average to 21 feet, with facilities built after the year 2000 recording an average of 23 feet. New buildings in the Burnside Business Park, such as 420 Higney Avenue and 90 Cutler Avenue, have been built to a 28 foot clear height. Yet, this is well short of industrial distribution facilities in Toronto, where a 34 foot clear height is the new norm, and in some instances, are greater than 40 feet. User demands have changed dramatically over time and developers, and owner-users alike, are designing their real estate assets to match the new requirements. This change has occurred across all user types as well, including light and heavy manufacturing, truck-maintenance facilities, industrial flex space, and distribution and storage warehousing, the latter of which has seen the most pronounced physical transformation.

While newer facilities typically have higher clear heights than older facilities in the market, on average, they also achieve greater net rental rates. An exception to this is the buildings surveyed

CBRE Halifax White Paper | 3

CBRE Halifax White Paper February 2017

from the 1960’s, which recorded higher average net asking rates than buildings constructed through the 1970’s, 1980’s and the 1990’s. The explanation to this exception is that these older buildings no longer represent pure industrial uses due to their locational advantages over the newer buildings in the market. Many are situated along commercial corridors, benefiting from highly visible locations and good access to major traffic arterials, which attracts commercial/quasi-retail tenants and puts upward pressure on rental rates and underlying land values.

While it is apparent that clear heights have been increasing over time, higher net rental rates and higher clear heights don’t appear to be correlated. When comparing the average net asking rent across a range of clear heights, no immediate trend emerged. This is understandable considering that multiple variables influence average asking rents, such as location, exposure to traffic arterials, use, type and physical character of the specific unit, and many others as previously discussed.

Using grouped data analysis, we’ve analyzed industrial buildings that are largely similar in all cases and grouped them based on clear heights at 14 feet, 18 feet, and 22 feet, focusing on the average net asking rates. It was determined that the difference in net rent per sq. ft., between each height class, was approximately $0.25; $6.00 per sq. ft. for 14 feet; $6.25 per sq. ft. for 18 feet; and $6.50 per sq. ft. for 22 feet. While a $0.25 per sq. ft. difference in rent may seem insignificant per annum, the annual rent savings on a cubic foot basis are dramatic.

Table 1

Building Area (sq. ft.) 10,000 10,000 10,000

Clear Height (ft.) 14 18 22

Cubic Feet 140,000 180,000 220,000

Net Rent $6.00 $6.25 $6.50

Annual Rent $60,000 $62,500 $65,000

Rent Per Cubic $0.43 $0.35 $0.30

Reviewing Table 1, this example shows that a 10,000 sq. ft. building with 22 foot clear heights, would pay a net rental premium of 8.3% more than a similar building with 14 foot clears; however, when viewed on a cubic foot basis, a user actually saves over 30% per annum. For users that derive utility from higher clear heights, the economic advantage of ‘going-up’ is very attractive. This financial efficiency extends not only to tenants, it also applies directly to landlords who wish to preserve their income stream in the future, notwithstanding a slightly higher initial construction cost.

Table 2

Building A Building B Change

Building Footprint 50,000 32,143 -36%

Clear Height (ft.) 18 28

Cubic Feet 900,000 900,000

Net Rent per sq. ft. $6.50 $8.50 31%

Annual Rent $325,000 $273,214 -16%

Annual Rent Savings $51,786 per annum

$ 258,929 per term

Economic advantages also exist for users considering a transfer from an older industrial facility to a newer modern construction, especially for distribution or storage warehousing purposes. Notwithstanding that the newer facilities achieve higher net rental rates than older facilities, a user can pay less overall in rent on an annual basis, than if they were in an older, low ceiling height building. Table 2 details an example of a user

CBRE Halifax White Paper February 2017

occupying Building ‘A’, comprising 50,000 sq. ft. with an 18 foot clear height, which equates to 900,000 cubic feet of space. Assuming this user doesn’t need to expand operations and maintains the 900,000 cubic feet, they can shrink their leased premise footprint by approximately 36% by moving into Building ‘B’, which has a 28 foot clear height. Assuming Building ‘B’ has a rental rate premium of 30% over Building ‘A’, which is reasonable in our market, Building ‘B’ will provide the user an annual savings of nearly $52,000 per annum, or 16%. Over a five year term, that is an aggregate savings of $258,929. Add in similar reductions in Additional Rent, and the savings easily outstrip the potential one-time capital costs of new racking and forklifts.

The continued emergence of e-commerce and just in-time inventories have the competitive logistics and courier industries striving for efficiencies, and cost reductions. High clear height warehouses provide ancillary benefits of reduced forklift travel distances; resulting in the increased fulfillment times and, perhaps, even eliminating the need of one or more warehouse employees.

As national and international companies achieve these cost savings in larger cities throughout North America, a trickledown effect is expected to continue to drive demand for higher clear heights within Atlantic Canada. Landlords and developers should embrace the slightly higher construction costs associated with higher clear height buildings, as the benefit of achieving and maintaining higher rents into the future is a win for the owner and efficiencies and savings are borne by the user.

In an upcoming paper, we will dive into the cost differentials in land, construction and labour between the three Maritime Provinces. In the meantime, please feel free to reach out to either Gary or myself, with any questions or advisory services to obtain the optimal solution for your company.

Want to Receive Future Real Estate Insight?

Visit us online at www.cbre.ca/maritimeindustrialteam and click on Receive Updates & Reports.

BRAD BAKKE, AACISales RepresentativeHalifax, Nova Scotia T : 1 902 492 2084M : 1 902 240 8224brad.bakke@cbre.com

CBRE Limited5855 Spring Garden RoadSuite 300Halifax, Nova Scotiawww.cbre.ca/halifax

GARY MACKENZIESenior Sales AssociateHalifax, Nova Scotia T : 1 902 492 2064M : 1 902 440 4226gary.mackenzie@cbre.com

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accu-racy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved adn cannot be reproduced without prior permission of CBRE