Public Transit Revenue Tools Could Disrupt Industrial Development

Proposed 15% hike in development charges would impact GTA industrial market

TORONTO, October 28, 2013 – At 745.0 million SF, the Greater Toronto Area (GTA) is the third largest industrial market in North America and is a major contributor to regional employment and national Gross Domestic Product. New revenue tools have been proposed to fund the expansion of public transportation in the region, but they could negatively impact the future growth of this important sector. One proposed method of revenue generation in particular, a 15.0% increase in development charges, would come at a time when municipalities had already been raising development charges and making industrial construction more costly. A special report by CBRE Limited examines the current development charge regime and the impact that new revenue tools could have on future industrial development in the GTA.

Development charges are a levy paid by developers to fund both hard and soft infrastructure costs when they apply for a building permit. With many municipalities largely built out, higher development charges have been used in recent years to substitute for slower tax revenue growth and rising infrastructure costs.

“Development charges were an increasing concern long before transit funding came to the forefront,” said Andrew Wright, Executive Managing Director for CBRE Limited. “Investors and developers seriously consider development charges when assessing potential land purchases and planning future construction. With the industrial vacancy rate a mere 2.6% in the GTA and strong demand for modern warehouse and distribution facilities, new development will be key to growing this sector in the future.”

The highest industrial development charges exist in York Region where a hefty $19.41 psf charge for new industrial development is in place on top of municipal and educational development charges. Richmond Hill is the most expensive municipality in the GTA for industrial construction with development charges totalling $23.89 psf. With new industrial buildings in the GTA averaging 241,388 SF over the last two years, a building this size would result in $4.7 million in development charges in Richmond Hill, which would climb to $6.6 million if the Metrolinx proposal for a 15.0% development charge increase is implemented.

While municipalities in York Region stand out on the high end, development charges vary across the GTA. Stouffville, Aurora, Vaughan, Newmarket, Markham and Oakville all have combined development changes in excess of $20.00 psf. Ajax, Whitby and Oshawa charge less than $10.00 psf and Toronto, which is largely built out, only charges a $0.58 psf education fee on new industrial development.

“A significant hike in development charges will require pro formas to be reassessed and has the potential to not only shift development within the GTA, but provide markets outside the region with a competitive edge,” noted Wright.

Once higher rates come into force, there is no doubt that developers will attempt to maximize existing properties prior to seeking new development opportunities. All municipalities in the GTA allow for industrial property expansions without additional development charges being incurred. Once existing properties have been built out, developers would likely pursue opportunities in municipalities with lower development charges. Currently, municipalities in the western and eastern portions of the GTA have an advantage in this regard; however, municipalities in Southwestern Ontario could see some benefit as well. Lower costs are already making those markets more competitive.

“While nothing is concrete at this point, portfolio decisions are being made with development charges top of mind,” said Wright. “If nothing else, this should serve as a reminder that transit revenue tools could have far reaching implications and that funding options must be studied carefully.”

About CBRE

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2012 revenue).  The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.

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