How Much Is Your Building Really Worth?

Establishing True Valuations Across Differing Markets 

Q1 2020 Insight, Toronto-Central Markets

May 8th, 2020

This year started off extremely strong with vacancy rates hitting historically low levels and net rental rates increasing in excess of 20% year over year. Everyone was struggling to find the right property to lease and/or purchase as the economy was firing on all cylinders. And then the COVID-19 pandemic hit…

The Canadian Federal Government ordered the closure of all non-essential businesses in mid-March and most activity in the marketplace was frozen….. Projects that were at early stages were put on hold or canceled, while conditional transactions were either canceled or extended until a later date…. Such a shift in the market during the final two weeks of Q1 will ripple out into Q2, as well as Q3 and beyond.

It is too early to say but one thing is for sure, the lockdown and shutting down of businesses will have a long-lasting impact on our economy and the real estate market as well.

Key Takeaways from Q1 2020

• Net rental rates increased over 22% year-over-year
• Availability rates went down to 1.3%……  
• Average asking net rental rates were $9.07 PSF

Interesting Announcements this Quarter – New Construction:

Major Users: Irving Tissue pre-leased a warehousing distribution facility in North York, a 150,000 SF building with Hwy 400 exposure scheduled for completion in Q3/Q4 2020, while Estee Lauder renewed its lease on a 373,492 SF freestanding facility at 550 Petrolia Road in North York.

Why are the GTA Central Markets in such demand?

Is it proximity to labour and a higher population density, and thus, a reduction in transportation cost? Or is it savings in development charges vs 905 areas, proximity to major transportation nodes, highways, public transportation, etc?… Or all of the above?

Well, one thing is for certain, the Toronto-Central Markets are highly sought-after by both Investors and Occupiers of commercial real estate and is an environment worth exploring for opportunities.

So, if you are an Investor, Landlord, or Owner-Occupier you may be wondering…

“How much is my property really worth?” 

What rental rate can I expect? How much $/PSF would I be able to get if I sold my building?

These questions are being asked all the time.

The answer to this will depend on a range of factors, including: 

• the age and size of the building, 
• lot size, 
• ceiling height, 
• office component, 
• parking, 
• trucking access, 
• truck parking if available, etc….

In order to get to the truth, we need to dig a bit deeper…

This week we are covering the Toronto Central Markets (Toronto, North York, Etobicoke & Scarborough)

Statistical Summary – GTA Industrial Market – Q1 2020

GTA Industrial Market Overview – Q1 2020 – Credit – Cushman & Wakefield ULC

Statistical Summary – GTA Central Markets (Toronto, North York, Etobicoke & Scarborough), Q1 2020

Q1 2020 GTA Central Markets Industrial Stats – Source: Cushman & Wakefield ULC 

Strong demand and continued leasing early on pre-COVID, coupled with a lack of new vacant space in the GTA Central Markets pushed the availability rate down further to just 1.3% for Leasing and 0.4% for Sales. We had negative absorption of more than 759,000 SF this quarter. 

Let’s take a closer look at how the different Toronto Central Markets performed during Q1 2020…

GTA Central Markets (Scarborough)
Properties Sold between January 2020 – March 2020, from 20,000 SF plus 

In the Scarborough Sub Market in Q1 2020, a total of 4 properties were sold (463,853 SF); 3 were investment sales and 1 was a user sale. The prices achieved were in the range of $127 – $281 PSF, with an average building size of 115,963 SF and an average price of $170 PSF. 

GTA Central Markets (Scarborough)
Properties Leased between January 2020 – March 2020, from 20,000 SF plus

In the Scarborough Sub Market, 1 property was leased in Q1 2020.

GTA Central Markets (North York)
Properties Sold between January 2020 – March 2020, from 20,000 SF plus

In the North York Sub Market in Q1 2020, a total of 6 properties were sold (248,052 SF); 3 were investment sales and 3 were user sales. The prices achieved were in the range of $154 – $347 PSF, with an average building size of 41,342 SF and an average price of $232 PSF.

GTA Central Markets (North York)
Properties Leased between January 2020 – March 2020, from 20,000 SF plus

In the North York Sub Market, 2 properties were leased (totaling 523,492 SF) in Q1 2020. 

GTA Central Markets (Etobicoke)
Properties Sold between January 2020 – March 2020, from 20,000 SF plus 

In the Etobicoke Sub-Market in Q1 2020, a total of 2 properties were sold (154,112 SF); 2 were investment sales. The prices achieved were in the range of $136 – $151 PSF, with an average building size of 77,056 SF and an average price of $144 PSF.

GTA Central Markets (Etobicoke)
Properties Leased between January 2020 – March 2020, from 20,000 SF plus

In the Etobicoke Sub-Market in Q1 2020, a total of 2 properties were leased (93,292 SF). The net rental rates achieved were from $8.50 – $8.95 PSF, with an average building size of 46,646 SF and an average net rental rate of $8.73 PSF.

What Lies Ahead:

1. Rental Rates: Not all real estate is created equal…. It is important to note that the Industrial asset class will weather this storm and come out strong, if not stronger than before… with the only exception potentially being small-bay properties. Increases in online retail sales, moving away from “just in time” inventory and relocating parts of manufacturing back to Canada from overseas (and including the production of PPE equipment) will continue to put pressure on industrial markets; keeping our rental rates steady and increasing, although maybe at a slower pace. Overall, we are still in a Landlord’s market and have a long way to go….

2. Property Values: Multi-tenant industrial properties that are owned by private equity funds (and are highly leveraged) may see some difficult days ahead… we may see vacancy rates increase and maybe even CAP rates as well…..  However, larger, single-tenant, logistics, warehouses and distribution facilities, and even manufacturing, should keep their values. A telling sign: those Landlords collected over 90% of their rents in April and May 2020….

3. Development Opportunities: There is not much land to be developed in the Toronto-Central Markets so we will continue to see infill redevelopment… 

Conclusion

So, how much is your property really worth?

What rental rate can you expect or how much per SF would you be able to get if you sell your building? How much can we compress CAP rates to create even greater value?

Well, the answers to these questions will depend on a variety of factors, many of which we can quickly uncover in an assessment of your situation. 

And whether you are an Investor or Occupier or Lender we understand that the impact of the COVID-19 pandemic on your business may be significant. All parties involved have keen issues they are focused on and potentially different priorities at this moment. Proper and transparent communication is what will sustain and strengthen the relationships that will get us to the other side… Just remember…

We are all in this together…

DISCLAIMER: All information herein is for informational purposes only. This is not intended as professional legal, tax or accounting advice. We are not liable for any damages, real or perceived, as a result of you receiving or consuming this information. Please consult your attorney, accountant, or other counsel prior to making any decisions…