Q1 2011 | INDUSTRIAL
toronto ontario
COLLIERS INTERNATIONAL | MARKET REPORT
Canadian Market Overview The economic outlook for Canada in 2011 remains cautiously optimistic overall. Canada’s monetary policy and, in particular, the target of two percent inflation has steered the economy out of the recession. Our wealth of natural resources has provided stability to the economy as oil and commodity values continue to steadily rise despite a slight slowdown in Q1 2011. Canadian GDP growth is projected at 3.1 percent for 2011, but progress may be limited by risks from the European credit crisis, a strong Canadian dollar, and a slower American economy, all of which also contribute to the ongoing depressed state of the manufacturing sector. The overnight interest rate remains at one percent and is expected to rise to two percent alongside the anticipated shift in fiscal policy from stimulus to restraint. The unemployment rate is still expected to remain in the 7.4 to 7.7 percent range, although job creation has recently improved and there is a growing, educated population demographic that will help to reduce this economic indicator.
MARKET INDICATORS
INVENTORY
2010 Q4
2011 Q1
|}
NEW SUPPLY
AVERAGE ASKING NET RENT
AVERAGE SALES PRICE
AVAILABILITY RATE SUBLEASE RATE TOTAL AVAILABLE SF NET ABSORPTION UNDER CONSTRUCTION
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Business confidence has risen in the past six months as careful spending and diligence through the recession is paying off. Investors are increasingly looking at Canada as a safe haven and with positive perceptions of our fiscally responsible banking and government systems. In relation to that, there has been a good rebound in the commercial property market in 2010 and into the first quarter of 2011. Interestingly, the current lack of speculative construction may lead to an increase in the number of design-build projects being undertaken in the near future as organizations seek to fulfill their space needs within time constraints.
GTA North GTA East GTA Central
GTA West
MARKET REPORT | Q1 2011 | INDUSTRIAL | TORONTO
Greater Toronto Area Overview Although Canada has not experienced many of the economic problems the United States faced to the same extent, the U.S. economy has impacted cross-border commerce and the Greater Toronto Area (GTA) industrial market. The GTA industrial market, the largest in Canada and one of the largest in North America, has recovered much faster than anticipated back to pre-recession levels, as there was a significant amount of leasing activity in recent quarters and investors were once again interested in purchasing industrial properties. The investment market has been leading the GTA industrial market out of the recession, with strong demand and increased activity. Available investment buildings were being quickly purchased, regardless of size. In the past six months, over 16 million square feet of industrial buildings changed hands in the GTA – almost equivalent to the entire
transaction volume for 2009. However, investment opportunities are expected to be limited in the near future, as major institutions and real estate investment trusts (REITs) hold on to assets for their steady revenue streams. The GTA industrial leasing market also demonstrated a strong performance with all GTA markets reporting a decline in the availability rate for Q1 2011. As a result, the overall GTA availability rate decreased from two-year historically low rates of 5.8 percent in Q3 2010 to 5.4 percent in Q1 2011, which correlated to a positive net absorption of over 2.8 million square feet. The average rental rate marginally decreased from $4.63 per square foot in Q3 2010 to $4.57 per square foot in Q1 2011, mainly due to downward pressure on rental rates as more Class B and Class C space became available as Class A space was taken up.
Over the next 12 months, the availability rate is expected to continue to decrease, as corporate expansion plans that were put on hold during the recession are now being executed and the space needed for growth is being acquired. As the market continues to show signs of improvement, this should generate increased leasing activity as tenants try to secure their long-term real estate plans in light of limited new supply over the short-term. Increasing construction costs and municipal development charges have made the development of new industrial properties challenging given existing rental rates. However, Colliers foresees upward pressure on rents given the lack of supply and growing health of the market, which is expected to stimulate new construction in 2012.
GTA | HISTORICAL PERFORMANCE & FORECAST | Q1 2001 - Q1 2012F Average Asking Net Rent
Availability Rate
Absorpotion
(100,000 SF)
60
FORECAST
40
4.6
20
2.3
0
(0.0)
(20)
(2.3)
(40)
(4.6)
(60)
1 2 3 4
2001
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2002
Source: Colliers International, March 2011
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6.9
| COLLIERS INTERNATIONAL
2003
2004
2005
2006
2007
2008
2009
2010
2011
(6.9)
Average Asking Net Rent ($)/Availability Rate (%)
Absorption
MARKET REPORT | Q1 2011 | INDUSTRIAL | TORONTO
GTA Central THE MARKET
TRENDS
Market conditions in GTA Central tightened over the past six months and the availability rate decreased to 3.8 percent by the end of Q1 2011, a two year historical low. With around nine million square feet of industrial space currently available, the GTA Central market continued to quote the lowest availability rate among GTA industrial markets. The submarkets with the highest availability include Etobicoke, North York Absorption and Scarborough, while East York, Toronto and York all reported an availability rate below one percent.
The average asking net rental rate trended relatively flat from Q4 2010 through to the beginning of 2011, at approximately $3.86 per square foot. The GTA Central market itself is currently flat, however as space is expected to be absorbed, this will create GTA Central Industrial Market upward pressure on rental rates.
Historical Performance & Forecast Q1 2001 - Q1 2012f FORECAST Through Q1 2011, leasing activity has Availability Rate Average Asking Net Rent been lower than average because of a predominance of Class B and Class C buildings which are in lower demand, but is expected to pick up as rental rates are forecasted to increase to $4.55 per square foot by Q1 2012.
GTA CENTRAL | HISTORICAL PERFORMANCE & FORECAST | Q1 2001 - Q1 2012F Average Asking Net Rent
Availability Rate FORECAST
20
4.0
(100,000 SF)
Absorpotion
6.0
2.0 0
(0.0) (2.0) (4.0)
(20)
1 2 3 4
2001
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2002
2003
2004
2005
2006
2007
2008
2009
2010
(6.0)
Average Asking Net Rent ($)/Availability Rate (%)
Absorption
2011
Source: Colliers International, March 2011
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MARKET REPORT | Q1 2011 | INDUSTRIAL | TORONTO
GTA North THE MARKET
TRENDS
Industrial space has been relatively abundant in the GTA North, especially in Vaughan, one of the best submarkets for real estate sales. Demand for industrial space in GTA North remains strong, as absorption was convincingly positive from Q4 2010 through Q1 2011 and the availability rate decreased by one percent over that same time period to 5.2 percent. Given a lack of new supply, this indicated a recovery in the manufacturing industry, which has made up a significant portion of space usage in GTA North.
The average asking net rental rate has remained relatively steady from Q4 2010 through the start of 2011 and ended the first quarter at $4.96 per square foot. The GTA North has been a market where rental rates remained soft as landlords created more attractive opportunities for tenants searching for space.
Overall, close to one million square feet of industrial space was absorbed in the past six months in the GTA North market. The majority of available space was in Vaughan with approximately 3.6 million square feet on the market and an availability rate of 5.1 percent. Newmarket had the least amount of space with an availability rate of 2.4 percent.
FORECAST
Continuing to show its resilience against the economic downturn of 2009, the GTA North market experienced high levels of absorption, with spaces fetching the highest prices throughout the GTA. The investment market is exhibiting strength in all building class types, but primarily in Class A buildings. Small- and mid-bay industrial space is extremely active in this market and is expected to continue throughout 2011.
Leasing activity is forecasted to continue gaining momentum and reach a stable level of activity by the end of 2011. Proposed new construction for 2011 is limited, as landlords and developers who previously built on speculation are favouring lower-risk build-to-suit construction. Simultaneously, investors are acknowledging that greater tenant stability and higher lease rates make these industrial build-to-suit properties attractive additions to their portfolios.
GTA NORTH | HISTORICAL PERFORMANCE & FORECAST | Q1 2001 - Q1 2012F Average Asking Net Rent
Availability Rate
Absorpotion
(100,000 SF)
20
FORECAST
15
6.0
10
4.0
5
2.3
0
0.0 (2.3)
(5) (10) (15)
(4.6) 1 2 3 4
2001
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2002
Source: Colliers International, March 2011
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8.0
| COLLIERS INTERNATIONAL
2003
2004
2005
2006
2007
2008
2009
2010
2011
(6.0)
Average Asking Net Rent ($)/Availability Rate (%)
Absorption
MARKET REPORT | Q1 2011 | INDUSTRIAL | TORONTO
GTA East THE MARKET
GTA East is the smallest market in the GTA and it showed the highest vacancy rate among all GTA markets, even though it had dropped from 8.8% in Q3 2010 to 7.7% in Q1 2011, back to the same level observed a year ago. Despite positive absorption of 360,000 square feet in the last six months, the net asking rent decreased slightly to $4.84 per square foot. At the time of print, around 2.5 million square feetAbsorption of industrial space was available in GTA East, largely in Whitby and Pickering. TRENDS
The overall decreasing availability continues in the industrial market and signifies the recovery of the auto and manufacturing sectors that were heavily impacted by the recession. Although the GTA East has a larger supply of older space which is causing some downward pressure on rents,
smaller buildings are attracting interest and experiencing increased leasing activity. FORECAST
As the economy improves, Colliers predicts that the availability rate will decrease to aroundGTA 6.6 percent by the end Market of 2011. East Industrial Rates are expected to remain low, Historical Performance &because Forecast of the challenges of leasing spaces Q1 2001 - Q1 large 2012f in Whitby and Oshawa due to perceptions Availability Rate Asking surrounding local unions that Average have been a Net Rent concern for companies considering moving to the East. As alternate GTA markets continue to tighten, Colliers believes tenants may look towards GTA East again as a potential release valve.
GTA EAST | HISTORICAL PERFORMANCE & FORECAST | Q1 2001 - Q1 2012F Average Asking Net Rent
Availability Rate
Absorpotion
(100,000 SF)
15
FORECAST
12.0
10
8.0
5
4.0
0
(0.0)
(5)
(4.0)
(10)
1 2 3 4
2001
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2002
2003
2004
2005
2006
2007
2008
2009
2010
(8.0)
Average Asking Net Rent ($)/Availability Rate (%)
Absorption
2011
Source: Colliers International, March 2011
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MARKET REPORT | Q1 2011 | INDUSTRIAL | TORONTO
GTA West THE MARKET
In Q1 2011, the market for large distribution space lost some of its momentum from 2010 as leasing activity diminished. As stability returned to the economic climate, pent up demand from users driven by anticipation of economic expansion and specifically retail activity resulted in significant leasing activity in large distribution facilities. Tenants have exhibited a “flight to height�, which resulted in a growing supply of space Absorption with lower clear heights, particularly in mature markets such as Central Mississauga. This has caused downward pressure on demand for buildings with less than 24 feet clear heights, which trade at a rate lower than the market average rent. TRENDS
The strong dollar has made the GTA an attractive destination for retailers looking to be located near their consumer base. The GTA West market has seen strong demand for high
quality distribution facilities from warehousing and third party logistics companies. Interest in buildings with clear heights over 24 feet has lead to negative absorption and increased vacancy in less efficient space, which is concentrated in mature markets.
that the scarcity of modern facilities will generate an increase in build-to-suit projects. Speculative construction is expected to follow once rental rates have recovered enough to make this an appealing option. Colliers expects that scarcity will drive leasing rates for first class distribution facilities to $5.80 per square New construction activity has not kept pace with GTA West Industrial Market foot over the next 12 months. the increase in demand for distribution&space. Historical Performance Forecast Developers haveQ1 become apprehensive Second generation facilities are likely to 2001more - Q1 2012f about the risks of new construction and there continue to have difficulty attracting interest. Availability Rate Average Asking has not been a return to the strong speculative In Net GTARent West, manufacturing is showing building market that the GTA West previously signs of recovery, which will continue to experienced. High development charges, increase demand for facilities with higher increased construction costs and insufficient clear heights. As a result, prices for market rents have inhibited new construction, smaller buildings with low clear heights are although anticipated upward pressure on rents expected to continue to be offered at lower should stimulate new construction in Q4 2011 rates, with rental rates remaining stable at or early 2012. approximately $4.45 per square foot. FORECAST
High demand for existing large distribution space has caused upward pressure on rental rates for this building class. Colliers anticipates
GTA WEST | HISTORICAL PERFORMANCE & FORECAST | Q1 2001 - Q1 2012F Average Asking Net Rent
Availability Rate
Absorpotion
(100,000 SF)
FORECAST
40
6.4
20
3.2
0
0.0
(20)
(3.2)
(40)
1 2 3 4
2001
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2002
Source: Colliers International, March 2011
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| COLLIERS INTERNATIONAL
2003
2004
2005
2006
2007
2008
2009
2010
2011
(6.4)
Average Asking Net Rent ($)/Availability Rate (%)
Absorption
MARKET REPORT | Q1 2011 | INDUSTRIAL | TORONTO
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Glossary of Terms Asking Net Rent The dollar amount requested by landlords for direct available space, not including subleases, expressed in dollars per square foot per year.
Inventory Industrial inventory consists of existing industrial buildings which are 15,000 square feet and larger.
Availability The amount of available space divided by the building’s inventory base. Available space is space that is available for lease, and may or may not be vacant.
Net Absorption The net change in physically occupied space between the current measurement period, and the last measurement period. It can be either positive or negative.
Industrial Building Facilities in which the space is used primarily for research, development, service, production, storage or distribution of goods, and which may also include some office space. Industrial buildings are further divided into three primary classifications: manufacturing, warehouse and flex space.
Vacancy The amount of vacant space divided by the building inventory base. Vacant space is physically unoccupied, and it may or may not be available for lease or sublease. This is physical vacancy. It is not determined whether a tenant is paying rent on the space.
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MARKET REPORT | Q1 2011 | INDUSTRIAL | TORONTO
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