Like many other aspects of life, commercial and industrial real estate has felt the drastic effects of the COVID-19 pandemic.
As a reaction to the shift from working at the office to working at home, continuous government shutdowns and restrictions, and the rise of e-commerce, many businesses have had to rethink their entire business operation to remain profitable and relevant. One such area that business owners have recalibrated is the physical space their business requires to operate out of and how that space is best utilized.
We have seen a growing trend in commercial retail shifting away from big box, brick and mortar stores towards online shopping and e-commerce. This has resulted in the decline of the acquisition of large commercial spaces and has given rise to a boom in the search and acquisition of industrial properties.
What is an industrial property?
You may be asking yourself: “what is an industrial property?” We typically think of industrial properties as big manufacturing warehouses, but it can be much more than that. Although manufacturing is a prominent use of industrial land, it may also be used for storage and distribution locations/warehouses, research and development operations, as well as a mix of showrooms and offices. These uses are becoming increasingly desirable, especially here in Ottawa, as we experience a continuing tech boom (requiring new space for research, development, and manufacturing) and high demand for construction (requiring showrooms to display their products and work to interested customers).
Notwithstanding the fact that conceptually, it may make sense to shift your focus away from big box commercial spaces and into the industrial world, there are several important factors to consider when investigating an industrial property acquisition.
Zoning/Use
Despite the overarching umbrella that industrial land could be used for, it is vital to any acquisition of land, specifically industrial, to understand what the property is zoned for and what uses are permitted in that zone. Although some uses may be permitted on the face of the zoning by-law, there may be certain restrictions to a use that are associated with the gross floor area of the building or that must be used as an ancillary to an already established permitted use, i.e. a bar may not, in itself, be a permitted use on an industrial zoned land, but that bar may be permitted if it is ancillary to a permitted distillery or brewery in operation on the land. Given the fundamental impact that zoning will have on your ability to use the property as desired, it is imperative that the use of a property under the relevant zoning by-law be understood.
Environmental
Moreso than its residential and commercial counterparts, industrial lands are typically more susceptible to environmental contamination given the nature of their use. Depending on whether you plan to tear down and reconstruct a building or simply renovate an existing structure on industrial land and are obtaining financing to do so, it is very likely that your lender will require, at a minimum, environmental contamination reports, being Environmental Site Assessments Phase I and, if required, Phase II.
A Phase I Environmental Site Assessment is an investigation of a property to determine if contaminants are present and, if so, the location of these contaminants. If contaminants are found in the soil, then you will likely need to conduct a Phase II Environmental Site Assessment, which is a more invasive investigation that involves the collection of soil and ground water samples to test the concentration of such contaminants. It may be a requirement of your lender that the site be environmentally clean prior to any advance of funds, and it is important to understand and potentially budget for Environmental Site Assessments that could cost a few thousand dollars (Phase I) to $5,000.00 or more (Phase II, depending on severity) and that could take several months to complete, not to mention the remediation costs and timeline after that.
Insurance
A third consideration to budget for when contemplating the acquisition of an industrial property are the potentially increased costs of insurance relative to residential or commercial property due to the increase hazards and potential liability. For reasons explained above, environmental issues or concerns by the insurer could lead to increased insurance premiums. Additionally, given the typical operations, comings and goings of delivery trucks, machinery, and equipment on site, insurers may require both owned and non-owned automobiles in addition to basic property liability and equipment coverage.
It is important to discuss the parameters of your business and use of the property with your insurance provider to adequately budget for annual insurance premiums.
Going Forward
These are just a few of the issues to consider when looking to acquire an industrial property. Given that industrial properties will be a new venture to many individuals and businesses, it is important to have the proper advice to guide you through the process and ensure your rights are protected.
Should you be interested in exploring the acquisition and/or leasing of an industrial property, please feel free to reach out to our Real Estate and Development team and discuss your options.
