GTA industrial space crunch drives spec development: Colliers
Steve McLean, (REAL ESTATE NEWS EXCHANGE) — “Online retailers’ market share is not decreasing,” Peter Garrigan, managing director for Colliers Canada’s Toronto Region Industrial Practice Group, and lead author of the company’s GTA industrial market report for Q2 2019, told RENX.
“The need for e-commerce companies to expand their networks, and as a result their need for logistics facilities, will only continue to increase. Canadian company Shopify recently announced they will be pouring $1 billion to expand their facility network in the United States.”
And in the Toronto market itself, Purolator recently announced the construction of a $300-million, 430,000-square-foot national “super hub” in the central GTA.
The activity is leading to increased leasing rates and the emergence of some speculative building.
New industrial supply delayed
The industrial availability rate for the quarter was 1.2 per cent, down 46 basis points from a year earlier. Largely due to inclement weather conditions early in the spring, developments such as 75 Venture Dr. in Scarborough and 2233 Sheppard Ave. W. in North York, which were originally expected to be finished in the quarter, have had their completion dates pushed back until later this year.
Nearly three million square feet of industrial space is expected to be delivered in the third quarter, with another 1.4 million square feet scheduled to follow in the final three months of the year. Of the 8.8 million square feet under construction, Peel Region is responsible for more than half, with Caledon alone accounting for nearly 30 per cent.
“The properties that are the most sought after are the ones that provide the best combination of central location with proper clear height,” said Garrigan, who was appointed president of the Society of Industrial and Office Realtors’ Canada Central Chapter earlier this month.
“While state-of-the-art facilities are popping up more frequently in the GTA north and west markets, it’s the GTA central market that has the lowest availability. At the end of Q2 2019, there were no availabilities greater than 15,000 square feet within the central with between a 26-foot and 29-foot clear height.”
With availability at historically low levels, tenants are considering making lower-quality space fit their existing requirements.
Increase in spec industrial developments
The imbalance between supply and demand is also fueling speculative industrial developments.
“The pipeline for spec construction will continue to increase in the next three years,” said Garrigan. “A lack of available and readily developable industrial land will hold back the speculative construction market, but the pipeline remains steady.”
Beedie, one of the largest industrial managers and developers in Canada with multiple properties in British Columbia and Alberta, is expanding into the GTA with four developments: Legacy Business Centre, a condominium industrial project in Mississauga scheduled for completion in the fall of 2020; two projects in Scarborough; and a fourth location yet to be announced.
“Beedie’s expansion into the GTA could spearhead what the small- to mid-bay market will look like several years from now,” said Garrigan.
“As land supply continues to decrease, industrial condos may become the norm for companies who don’t necessarily need large-bay space. The Legacy Business Centre itself will feature condos ranging from 11,000 to 17,000 square feet of space.”
Industrial sale prices and rents
The average sale price for industrial space in the quarter was $167 per square foot, up 2.1 per cent year-over-year.
“Sale prices tend to not increase as quickly as lease rates,” said Garrigan. “As cap rates continue to compress, profit margins are lessening. As a result, companies aren’t quite demanding sales the same way they are leases.”
The average asking net rent for GTA industrial space during the quarter was $8.66 per square foot, up 30 per cent year-over-year.
“Industrial rents should continue to increase throughout the second half of 2019,” said Garrigan. “This will be driven by supply and demand.
“As tenants have fewer options to occupy space, and demand will continue to outpace supply, rents will trend upwards. We are already starting to hear about availabilities and new transactions trading over nine dollars per square foot.”
Notable GTA industrial lease transactions
The most notable lease transactions during the quarter were:
* Polar Pak, with a head lease for 399,548 square feet at 2 Bramkay St. in Brampton;
* Skjodt-Barrett, with a renewal for 202,810 square feet at 5 Precidio Court in Brampton;
* Royal Automotive Group, with an extension for 201,046 square feet at 6655 Northwest Rd. in Mississauga;
* and 3M, with a head lease for 180,000 square feet at Gateway Distribution Centre in Halton Hills.
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