Greater Toronto Area Industrial Market Report - Avison Young

4 TH QUARTER 2014

Greater Toronto Area Industrial Market Report Partnership. Performance.

Market Overview Market confidence gained throughout the fourth quarter of 2014 has established positive momentum moving into 2015. Four prominent encouraging trends are behind the confident outlook: a consistent speculative building supply entering the market, the redevelopment of existing buildings, steady leasing demand, and an active sale market. Each one has helped set the stage for a strong start to 2015. Nevertheless, the market faces some challenges. Anticipated year-end big-box lease deals did not close, leaving notable developments – Triovest’s 95 Market Drive in Milton, Hopewell’s Mayport Distribution Facility in Caledon, and Prologis’ 3275 Argentia Road in Mississauga – vacant. Although some expected transactions were not completed by year-end, demand is still present from numerous tenants that have shown interest in large-block availabilities in recent months, and deals should follow in the new year. These large blocks now face additional unexpected competition as a result of the demise of Target, which could reintroduce the company’s 1.3-million-square-foot (msf) state-of-the-art distribution centre in Milton to the market.

MARKET FACTS

6.8

$5.95

Million square feet of total area of industrial speculative and designbuilds under construction in GTA

Average achieved rate for product over 300,000 sf in GTA West

628,000

3.2%

Square footage of Best Buy’s sublease at 86 Pillsworth Road in Caledon – largest sublease in GTA

Availability rate in GTA Central, the lowest in GTA

Large- & Small-Block Availabilities Balancing out large-block availabilities, smaller-block market activity has contributed to stable availability rates. The Greater Toronto Area (GTA)’s overall availability rate rose by 10 basis points (bps), quarter-over-quarter, to a respectable 4.4%. This was primarily influenced by the GTA’s largest market, GTA West, which settled at 5.7% at the end of the fourth quarter, after spiking above the 6% mark halfway through the year. Overall, steady interest in smaller-block product mitigated fluctuations caused by large-block availabilities in 2014. Tenant & Developer Trends Tenant demand centred on large, quality space, with the most sought-after buildings offering high dock door ratios, rail access, cranes, positioning along major arteries, and clear heights of at least 28 feet. On the landlords’ side, increases in taxes, development charges, and land prices (predominantly in the GTA West market) have pushed new developments ‘up’, meaning higher clear heights. For instance, Orlando Corporation’s speculative cross-dock facility at 8050 Heritage Road in Brampton has brought speculative industrial buildings to new heights as it hits the 40-foot clear mark. On the whole, the market (excluding the 300,000-square-foot (sf) and greater component) has remained advantageous for landlords, and as a result there has been a reduction in tenant inducements and free rent offered. Current Construction Activity Steady market activity and a landlord’s market have resulted in high investor confidence and an active development pipeline, with 4.1 msf of speculative development under construction and another 2.7 msf in design-build developments across the GTA. Speculative construction often outpaces design-build activity, and historically their total square footage amounts fluctuate in parallel to one another. The fourth quarter added 1.2 msf of new completions to the market, comprised solely of speculative development. Orlando Corporation’s projects made up almost 50% of the new product (7965 Heritage Road and 7825 Winston Churchill Boulevard), with Erin Mills Development Corporation’s 3600 Ridgeway Drive, Triovest’s 95 Market Drive, and Peel Properties’ 6400 Kennedy Road accounting for the rest. Collectively, these new developments are 55% available. In 2015, 13 projects representing 4.2 msf of inventory (speculative and design-build) are expected to enter the market, including Athena Automation’s 155,000-sf design-build systems centre in Vaughan. Further to the south, construction is underway on 1251 Tapscott Road, the first building at the Prologis Park Tapscott in Scarborough, with 115,000 sf preleased to a tire company (39,000 sf remain available). The submarket has garnered a lot of tenant traction lately, especially for product in the 80,000-sf and greater segment. It is not expected that a new wave of speculative developments will commence in 2015 beyond those already announced. The rise in construction costs (taxes, development charges, and land prices) necessitates an initial net rate of at least $6.50 per square foot (psf), which is not achievable at present, as asking rates are $6.50 psf. As well, Orlando Corporation’s prominence in the market has kept rental rates low since the company can offer aggressive rates compared to competing landlords and still achieve a feasible investment return.

Greater Toronto Area - Market Overview Further Design-Build Activity In terms of design-build activity, the fourth quarter saw two notable corporations, FedEx Ground and Hyundai Mobis, commit to future projects. FedEx Ground’s 422,000-sf facility, on 60 acres near Highway 27 and Martin Grove Road in Vaughan, is scheduled for a late 2016 completion date. The small-package shipping company has moved forward on the project because of the need to accommodate growing e-commerce business. The new facility will be larger than the company’s current premises by more than 200,000 sf. The project has also laid the groundwork for further industrial development in the recently released employment lands, with Costco in the public hearings and site plan review stage and anticipated to complete a deal in the second quarter of 2015. Meanwhile, Hyundai Mobis has signed a 15-year lease with Rice Commercial Group for a 550,000-sf distribution centre on land directly south of the Honda plant in Markham, with exposure onto Highway 404, to be completed by January 2016. Rice Commercial Group is developing the project jointly with Fiera Properties, which owns 80% of the development. Industrial Investment On the industrial investment side, prices remain high across the GTA. This is especially true for owner/user acquisitions. The fourth quarter’s largest acquisition, in terms of overall sale price, was Bentall Kennedy’s $36.2-million ($109 psf) acquisition of KingSett Capital’s 25 & 35 Brownridge Road in Milton, at a reported cap rate of 5.4%. KingSett Capital had purchased the building in July 2013 for $86 psf from Carttera Private Equities and expanded it by 105,500 sf. There has also been an acquisition market for flex industrial space. These are light industrial buildings with low clear heights and ample parking, which offer the possibility of asset repositioning as flex office. One instance was KingSett Capital’s repositioning of 6300 Viscount Road in Mississauga, which was vacant in 2012/2013, and is now home to Xerox and Direct Energy. KingSett Capital purchased the building in 2004 from Orlando Corporation at $80 psf, and sold it to Dream Industrial REIT in 2014 for $127 psf.

GTA Investment Market Capitalization Rates 10.0% 9.5%

Average Cap Rate

9.0%

Average Capitalization Rates

8.5% 8.0%

Product Type

Q3-14

Q4-14

7.5%

Single Tenant Industrial

5.8 %

5.8 %

Multi-Tenant Industrial

6.1 %

6.0 %

7.0% 6.5% 6.0% 5.5%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 '12 '13 '14 Single Tenant Industrial

Multi Tenant Industrial

Investment Volume Transactions Over $3 M

Average Sales Price per Square Foot Transactions Over $3 M $120

$110

$800

Average Price ($ psf )

Investment Volume ($ Millions)

$1,000

$600

$400

$100

$90

$80

$200

$70

$0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 '08 '09 '10 '11 '12 '13 '14

$60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 '08 '09 '10 '11 '12 '13 '14

Greater Toronto Area - Overall GTA - Industrial Market Trends 45

5%

$10.00

4%

$8.00

GTA - Occupancy Cost Trends

35 30

3%

25 20

2%

15 10

Average Price ($psf )

40

Total Available Rate

Total Available Area (000,000 sf)

GTA - Occupancy Cost Trends

GTA - Industrial Market Trends

$6.00 $4.00

1%

$2.00

0%

$0.00

5 0 Q4 '13

Q1 '14

Direct Available Space

Q2 '14

Q3 '14

Q4 '14

Sublet Available Space

Q4 '13

Availability Rate

Q2 '14

Asking Net Rent

GTAGTA - Available Space by Clear Height - Available Space by Clear Height

Q3 '14

Q4 '14

Additional Costs

GTA - Large Block Availability GTA - Large Block Availability

250

60

Number of Properties Available


Q1 '14

200 150 100 50

50 40 30 20 10 0

0 > 32 ft

28-32 ft

24-27 ft

Single Tenant

18-23 ft

> 250,000 sf

< 18 ft

100,000 - 249,999 sf

Single Tenant

Multiple Tenant

50,000 - 99,999 sf

Multiple Tenant

GTA MARKE T SUMMARY Market

Inventory (msf)

Availability Rate (%)

Asking Net Rent ($psf)

Current Quarter

Current Quarter

Change from Previous Quarter

Current Quarter


GTA West

369

5.7 %



$ 5.99



GTA Central

264

3.2 %

$ 5.70



GTA East

47

4.1 %



$ 5.12



GTA North

179

3.4 %



$ 6.20

GTA Total

859

4.4 %



$ 5.91



Greater Toronto Area - West GTA West - Industrial Market Trends

GTA West - Occupancy Cost Trends

GTA West - Industrial Market Trends 6% 5% 15

4% 3%

10

2% 5

$8.00


20

$6.00 $4.00 $2.00

1%

0

0% Q4 '13

Q1 '14


Q2 '14

Q3 '14

GTA West - Occupancy Cost Trends

$10.00

7%


Total Available Area (000,000 sf )

25

$0.00

Q4 '14


Q4 '13

140

35

120

30

60 40 20

Q3 '14

Q4 '14

Additional Costs

GTA West - Large Block Availability GTA West - Large Block Availability Number of Properties Available


GTA West - Available Space by Clear Height GTA West - Available Space by Clear Height

80

Q2 '14

Asking Net Rent

Availability Rate

100

Q1 '14

25 20 15 10 5 0

0 > 32 ft

28-32 ft

24-27 ft

Single Tenant

18-23 ft

< 18 ft

> 250,000 sf

Multiple Tenant

100,000 - 249,999 sf

Single Tenant

50,000 - 99,999 sf

Multiple Tenant

GTA W E ST - SUBMARKE T SUMMARY Market

Inventory (msf)



Current Quarter

Current Quarter


Current Quarter


Brampton

92

5.3 %



$ 5.39



Burlington

26

3.9 %



$ 6.74



Caledon

12

14.4 %



$ 6.00

Halton Hills

6

7.7 %



$ 5.95



Milton Mississauga Oakville

19 185 29

6.4 % 5.6 % 4.3 %

  

$ 6.40 $ 6.05 $ 6.27



GTA West

369

5.7 %



$ 5.99





Greater Toronto Area - Central GTA Central - Industrial Market Trends

GTA Central - Occupancy Cost Trends

GTA Central - Industrial Market Trends

GTA Central - Occupancy Cost Trends $10.00

4%

$8.00

10 3%

8 6

2%

4 2 0 Q4 '13

Q1 '14

Direct Available Area

Q2 '14

Q3 '14

Sublet Available Area


12

5%



14

$6.00 $4.00

1%

$2.00

0%

$0.00

Q4 '14

Q4 '13


Q2 '14

Asking Net Rent

GTA Central - Available Space by Clear Height GTA Central - Available Space by Clear Height

Q3 '14

Q4 '14

Additional Costs

GTAGTA Central - Large Block Availability Central - Large Block Availability 16 Number of Properties Available

120


Q1 '14

100 80 60 40 20

14 12 10 8 6 4 2 0

0 > 32 ft

28-32 ft

24-27 ft

Single Tenant

18-23 ft

< 18 ft

> 250,000 sf

Multiple Tenant

100,000 - 249,999 sf

Single Tenant

50,000 - 99,999 sf

Multiple Tenant

GTA CE N TR AL - SUBMARKE T SUMMARY Market

Inventory (msf)



Current Quarter

Current Quarter


Current Quarter

East York

10

2.8 %



$ 5.88

Etobicoke

76

4.1 %



$ 6.14



North York

70

1.9 %



$ 5.68



Scarborough

65

4.5 %



$ 4.81



Toronto

43

2.1 %



$ 8.46



264

3.2 %

$ 5.70



GTA Central*

* Total figures for the GTA Central include additional submarkets not listed above (i.e. York).


Greater Toronto Area - East GTA East - Industrial Market Trends

GTA East - Occupancy Cost Trends

GTA East - Industrial Market Trends 5% 4% 3% 1

2% 1%

0

0% Q4 '13

Q1 '14


Q2 '14

Q3 '14

Q4 '14


$8.00 Average Price ($psf )

2

GTA East - Occupancy Cost Trends

$10.00

6%



3

$6.00 $4.00 $2.00 $0.00 Q4 '13

Availability Rate

Q2 '14

Asking Net Rent

GTA East - Available Space by Clear Height

Q3 '14

Q4 '14

Additional Costs

GTA East - Large Block Availability GTA East - Large Block Availability

GTA East - Available Space by Clear Height

4

14 12



Q1 '14

10 8 6 4 2

3

2

1

0

0 > 32 ft

28-32 ft

24-27 ft

Single Tenant

18-23 ft

< 18 ft

> 250,000 sf

Multiple Tenant

100,000 - 249,999 sf

Single Tenant

50,000 - 99,999 sf Multiple Tenant

GTA EA S T - SUBMARKE T SUMMARY Inventory (msf)



Market Current Quarter

Current Quarter


Current Quarter


Ajax

7

3.7 %



$ 5.12



Oshawa

14

2.7 %



$ 5.50



Pickering

10

6.9 %



$ 4.89



Whitby

10

5.7 %



$ 4.99



GTA East*

47

4.1 %



$ 5.12



* Total figures for the GTA East include additional submarkets not listed above (i.e. Brock, Clarington, Scugog and Uxbridge).

Greater Toronto Area - North GTA North - Industrial Market Trends

GTA North - Occupancy Cost Trends

GTA North - Industrial Market Trends $12.00

4%

$10.00

3% 4 2% 2


6

5%



8

1%

0 Q1 '14


Q2 '14

Q3 '14

$6.00 $4.00

$0.00

Q4 '14


$8.00

$2.00

0% Q4 '13

GTA North - Occupancy Cost Trends

Q4 '13

Q2 '14

Q3 '14

Asking Net Rent

Availability Rate

GTA North - Available Space by Clear Height

Q4 '14

Additional Costs

GTA North - Large Block Availability GTA North - Large Block Availability

GTA North - Available Space by Clear Height

12 Number of Properties Available

60


Q1 '14

50 40 30 20 10

10 8 6 4 2 0

0 > 32 ft

28-32 ft

24-27 ft

18-23 ft

Single Tenant

> 250,000 sf

< 18 ft

Multiple Tenant

100,000 - 249,999 sf

Single Tenant

50,000 - 99,999 sf

Multiple Tenant

GTA N OR TH - SUBMARKE T SUMMARY Market

Inventory (msf)



Current Quarter

Current Quarter


Current Quarter

Aurora

6

0.8 %



$ 4.00

Markham

40

3.0 %



$ 6.58



Newmarket

9

3.4 %



$ 6.05



Richmond Hill

14

7.8 %



$ 6.75



Vaughan

105

3.3 %



$ 5.88



GTA North*

179

3.4 %



$ 6.20

* Total figures for the GTA North include additional submarkets not listed above (i.e. East Gwillimbury, Georgina, King and Whitchurch-Stouffville).


Greater Toronto Area - Overall S UM MARY OF TENANT OPTIONS

Market

Number of Buildings with Available Space

Properties with More Than 250,000 sf Available

Properties with 100,000 to 249,999 sf Available



Properties with Less Than 20,000 sf Available

East York

10

-

-

-

4

5

Etobicoke

89

1

7

11

19

51

North York

78

-

3

1

12

62

Scarborough

117

1

5

5

29

77

Toronto

32

-

3

2

6

21

326

2

18

20

70

216

Ajax

13

-

-

1

4

8

Oshawa

5

1

-

-

1

3

Pickering

21

-

2

3

3

13

Whitby

8

-

3

2

-

3

GTA East

48

1

5

6

8

28

Aurora

4

-

-

-

1

3

Markham

60

-

2

1

12

45

Newmarket

10

-

1

1

1

7

Richmond Hill

29

-

2

5

10

12

Vaughan

108

2

8

9

24

65

GTA North

211

2

13

16

48

132

Brampton

71

7

8

15

17

24

Burlington

25

1

4

1

8

11

Caledon

11

2

1

3

1

4

Halton Hills

3

1

-

-

-

2

Milton

11

2

2

1

3

3

Mississauga

327

7

20

27

71

202

Oakville

27

1

3

4

7

12

475

21

38

51

107

258

GTA Central

GTA West

Greater Toronto Area SI GN I F I C A N T I N DUSTRIAL LEASE TR ANSAC TIO NS Address

Tenant

Size

Lease Type

8690 Escarpment Way, Building F, Milton

Medline Industries

177,000 sf

New

6115 Edwards Boulevard, Mississauga

Walmart Canada

150,000 sf

New

5800 Keaton Crescent, Mississauga

Ontario Natural Food Co-op

115,000 sf

New

205 Doney Crescent, Vaughan

Michels Canada

107,000 sf

New

8350 Lawson Road, Milton

3E Logistics

107,000 sf

Renewal

GTA INDUSTRIAL MAP

Lake Simcoe

Georgina Brock East Gwillimbury Newmarket King

400

404

Aurora

WhitchurchStouffville

Uxbridge

Scugog

Caledon

GTA NORTH Vaughan

Richmond Hill

Markham

Pickering

407

Brampton 410

Halton Hills

GTA EAST

Ajax

409

Whitby Oshawa 401

401

GTA WEST 427 407

Milton

GTA CENTRAL

Mississauga 403

QEW

407

Oakville Burlington

403

Lake Ontario

Clarington

For more information on this report, please contact Avison Young:

Bill Argeropoulos

416.673.4029

Michael Nangle

905.283.2321

Principal & Practice Leader, Research (Canada)

avisonyoung.com © 2015 Avison Young Commercial Real Estate (Ontario) Inc., Brokerage E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young. Acknowledgement: Data for graphs, charts and tables used in this report are sourced from Avison Young and Altus InSite. Some of the data in this report has been gathered from third party sources and has not been independently verified by Avison Young. Avison Young makes no warranties or representations as to the completeness or accuracy thereof.

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