Limited large deals cause developers to realize the potential in catering to smaller-footprint tenants

Avisonyoung.com
Nov. 4, 2014

The low-availability environment experienced across the Greater Toronto Area (GTA) has triggered an essential growth in rental rates and some absorption of product in shell condition. The overall robust health of the market comes in part from a strengthening manufacturing sector. The sector, which accounts for 12% of Ontario’s GDP, has benefitted from a weakening Canadian dollar ($0.89 US at the close of October) and steady economic growth in the United States. In the investment market, low interest rates and lender liquidity have played a significant role in motivating industrial acquisition activity. The above circumstances establish a positive outlook for landlords as the market moves closer to the end of 2014 and towards the completion of 13 speculative developments.

These are some of the key trends noted in Avison Young’s Third Quarter 2014 Greater Toronto Area Industrial Market Report, released today.

The tightest aspect of the industrial sector is found in the sub-120,000-square-foot (sf) sector, where tenants have seen a continued growth in rental rates. An increasing portion of tenants have been gravitating towards superior-quality product, particularly facilities that offer a clear height of at least 28 feet and a reasonable amount of office space (5% of the gross leasable area). This flight to quality is outpacing the supply available for the sub-120,000 sf size range.

While developers have been catering to larger tenants (those requiring more than 200,000 sf), there is now a realization of the potential in shifting gears to secure the smaller-footprint activity. This is not to say that the 200,000-sf market has been doing poorly - it is actually fairly active; the concern lies in the projection of rental-rate growth and product availability. With two speculative projects anticipated for completion by the end of 2014, another 10 developments throughout 2015 and a final one in 2016, larger product will face limited rental-rate growth as compared with the resilient sub-120,000 sf sector.

The 300,000-sf-plus market, however, has not fully recovered since the recent recession.

“We have seen a significantly lower number of lease transactions greater than 300,000 sf than in years prior to 2008,” comments Avison Young Principal Mark Sevenpifer, based in the firm’s Mississauga office. “In the past, the annual number of large lease deals reached the low double-digits. So far this year, there have only been four such deals completed, with possibly two more anticipated by the end of 2014.”

Out of the 13 speculative developments coming on to the market, seven will have a gross leasable area greater than 300,000 sf.

The third quarter of 2014 also witnessed a breakthrough in Scarborough. Prologis broke ground on its new facility at 1251 Tapscott Road - one of the few remaining greenfield developments within Toronto’s city limits.

“In a submarket that has not received new development in years and holds an abundance of dysfunctional industrial buildings, the 32-foot-clear facility - demisable to 36,000 sf - delivers a desirable option to local users,” states Ryan Hood a Senior Vice-President based in Avison Young’s Toronto North office.

Remaining quite active beyond Scarborough, Prologis recently completed its projects at 3255 and 3275 Argentia Road in Mississauga - the only new deliveries in the third quarter of 2014 and prime examples of a strong 200,000-sf market. The 378,000-sf distribution centre at 3255 Argentia Road is now fully occupied by American Tire and Russell A. Farrow, leasing 171,000 sf and 207,000 sf, respectively.

In GTA North, the Vaughan Enterprise Zone (VEZ), a notable supply of vacant employment land within the City of Vaughan, has seen strong developer interest throughout the year. ATS Transportation leased NHD Developments’ 132,000-sf speculative development at 122 Stone Ridge Road, which is scheduled for completion in May 2015. Another developer, Isadan Holdings, has broken ground on its 68,000-sf development.

“Rental rates for new product in Vaughan, now around the $6.75 to $7 per square foot (psf) net mark, will continue to rise,” notes Avison Young senior industrial sales representative Reed Parks, who is based in the company’s Toronto North office. “Vaughan’s ability to attract multinational corporations over its fellow GTA municipalities is a strong indication of the city’s development-friendly mentality.”

With a flurry of development activity underway, the City of Vaughan is set in fast-tracking the opening of its West Vaughan Enterprise Zone (WVEZ), where Costco and a major freight-delivery company will break ground in late 2014 for a mid-to-late 2015 occupancy.

“There is a scarcity of large tracks of development-ready lands in GTA West. The City of Vaughan is poised to continue to take advantage of this fact in the WVEZ. Vaughan is open for business, willing to work in an aggressive fashion to land large-scale developments. The WVEZ will be the latest statement of this fact in the west GTA,” adds Avison Young Mississauga-based broker Trevor Ellis. “The dearth of development land available for large-scale projects elsewhere creates a great opportunity for Vaughan to market itself as the new centre for business investment.”

GTA’s overall animated leasing activity has also translated into the investment market. For sales transactions greater than $3 million, the average price has reached $113 psf. This situation is primarily due to the tight 30,000-sf to 50,000-sf submarket.

Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 1,600 real estate professionals in 60 offices, providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-family properties.