During these recessionary times, much of the discussion in the freight industry is on falling freight rates and excess capacity. There has been much less talk about the current state of the real estate market, specifically as it pertains to freight terminals and logistics facilities.

The fact is that the investment that a trucking or logistics company makes in plant and facilities can be one of the most important decisions of a CEO. Purchasing a building that is overpriced or does not meet the needs of the business and its clients can place a company in financial jeopardy. Conversely, the purchase of efficient, well-priced facilities can enhance the profitability of a logistics enterprise.

To learn more about the current state of the real estate market in Canada, I spoke with Mark Cascagnette, Vice President, Industrial Global Supply Solutions at Cushman and Wakefield Ltd. Brokerage, located in Toronto, Canada. Mark has been in this business for many years, having previously worked for CP Rail before entering the real estate industry.

I began our discussion by asking Mark how he would characterize the real estate market at this time. He replied that the market is “in a state of decline. There is less volume of freight moving. As a result there is less door density and more vacant doors.” Mark commented that a year or a year and a half ago, the capacity wasn’t available. Now “there is a glut of space with 500 cross-dock doors available in Toronto and even more in Montreal.”

I asked Mark to comment on some of the trends that he is seeing in the real estate market. He responded by stating that in “these recessionary times, low volume is putting downward pressure on price with no relief in sight. There is an increase in sublet activity and in sliding or lateral deals.” Mark labelled these “blend and extend.” Companies are asking their landlords if the can extend their stay (e.g. until 2016) in return for a reduction in rent or several months free rent.

This led to a discussion on the risks associated with this strategy. Mark acknowledged that this short term cash flow approach may place some companies in a difficult position if they are “leveraging their future” to stay in business in the coming months. With respect to the demand for freight terminals and logistics facilities, Mark commented that many companies are “trying to downsize.” He stated that “the demand for new space is marginal.” Some U.S. based companies with Canadian operations are looking at closing their Canadian facility in order to bring down costs.

Looking ahead, Mark expects to see a glut of terminals as the industry goes through a consolidation in 2010. “There is high demand for buildings under $5 million while there is poor demand for facilities over $5 million. He also mentioned that pricing is critical. “Facilities that are priced well will sell while overpriced buildings will not sell.”

This led to a discussion about obtaining credit in the current market environment. Overall Mark indicated that it is “very difficult.” However, he mentioned that the Business Development Bank takes an enlightened and informed approach to trucking company investments. They tend to look at “cash, the number of tractors and trailers in the fleet and the available land” in order to obtain leverage for financing. The charter banks tend to be more focused on cash and cash equivalents (A/R and A/P) and EBITDA.

I then asked Mark if he could offer some advice to the readers of this blog. He suggested that both landlords and tenants “should align themselves with strategic real estate specialists. Don’t try to go it alone. It is all about leverage, leverage, leverage.” This reminded me of the old adage that “he who has himself for a lawyer has a fool for a lawyer.” The same adage fits the procurement of real estate services.

Leading realtors can provide “value added advice.” It is particularly important to align yourselves with folks who understand the real estate business and the freight business. A good realtor in the freight industry will know the right questions to ask (e.g. height of ceiling, the carrying capacity of the dock levellers, the ability to move 53 foot trailers in and out of the facility etc.). Mark believes his company's transportation industry experience coupled with its real estate expertise provides them with a competitive advantage. He also commented on the value of his real estate tax advisory group that are equipped to help companies minimize their realty taxes.

To wrap up the discussion, I asked Mark to look into his crystal ball and tell us where he sees the real estate market in the next year. His response was realistic if not a bit discouraging. He expects to continue to see downward pressure on rates. The market will deteriorate further. “Realtors will be challenged to get better deals.” Mark expects to see some improvement in the spring of 2011. “Many companies don’t have the cash. This is probably the best time to renegotiate a lease or buy a building."