Q2 2021 Insight, Toronto-North Markets

Establishing True Valuations Across Differing Markets 

July 30th, 2021

Suppose a vote were taken by all of the commercial real estate professionals in the Greater Toronto Area.

Which asset class would they likely agree is the most in demand right now? Chances are, they would be fighting over who could shout out “Industrial!” first.

Now, let’s suppose we asked them a follow-up question as to why that is the case. Again, we would probably hear testimony applauding the specific type of space whose use perfectly complements the needs of many burgeoning industry sectors. Let’s face it, companies such as Amazon, WalMart, GoodFood, Costco, Home Depot, and Lowe’s haven’t been doing so bad lately.

Once the praise and excitement wore off, however, we may hear the grumbles and undertones of frustration – or even, desperation – cut through the crowd. That’s because the supply of industrial properties throughout the GTA is tapped out almost immediately as any new supply is released to the market. In fact, most of this ‘new supply’ are simply renderings of state-of-the-art facilities to one day take the place of dozens of acres of dirt; pre-leasing becoming a standard vehicle for securing space.

Yet when truly examining the broader commercial real estate industry, the fact that industrial real estate is in its current position might seem baffling. Out of all the various property types, industrial is the definition of simplicity.

Four walls on a slab. Covered by a roof. That’s it.

Yes, there are many ways to elevate the features to another level – but – both its form and function are repeatable and predictable.

Which begs the question… why is product so scarce?

Now, we’ve been down this road many times before, but, needless to say, we are simply going through growing pains. The market can only grow so fast (no matter how quickly it would like to). And bottlenecks are occurring at almost every stage of the process, from servicing land to permitting, and constructing, and sourcing inputs such as labour and raw materials.

Opportunity will present itself, albeit sometimes in unexpected and unpredictable ways. Investors seeking to deploy capital will need to remain competitive. Meanwhile, Users in need of a new home should remain patient and persistent while not being discouraged by changing pricing. And Landlords or Owner-Occupiers considering selling will have most of the bargaining power, and thus, should find ways to maximize proceeds.

The past couple of years have been chock full of change. However, barring any significant unexpected events, we should expect industrial real estate to continue cruising on its current trajectory for the months and years to come.

Key Takeaways from Q2 2021

• The availability rate decreased from 1.3% to 0.9%, with a lease availability rate of 0.8% and a sale availability rate close to 0% (40,000 SF out of 156M SF of inventory);
• We had 189,250 SF of construction completed and 2,898,026 SF still under construction; 
• We had absorption of 549,628 SF;
• The weighted average asking net rent increased from $12.35 to $12.78 PSF with additional rent of $3.95 PSF; and there was
• No applicable weighted average asking sale price due to the almost non-existent inventory.

Why are the GTA North Markets in such demand?

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-North Markets (Vaughan, Markham, Richmond Hill, Newmarket, Aurora)

Statistical Summary – GTA North Markets – Q2 2021  

So let’s take a closer look at how the different Toronto North Markets performed this quarter…

GTA North Markets (Vaughan) 
Properties Sold between April 2021 – June 2021, from 20,000 SF plus  

GTA North Markets (Vaughan)
Properties Leased between April 2021 – June 2021, from 20,000 SF plus

GTA North Markets (Markham) 
Properties Sold between April 2021 – June 2021, from 20,000 SF plus  

Properties Leased between April 2021 – June 2021, from 20,000 SF plus

GTA North Markets (Richmond Hill) 
Properties Sold between April 2021 – June 2021, from 20,000 SF plus  

GTA North Markets (Richmond Hill)
Properties Leased between April 2021 – June 2021, from 20,000 SF plus

1. Rental Rates: The Toronto-North markets continue to have the highest weighted average rental rates at $12.78 PSF, followed by the West markets at $11.15 PSF and Central markets at $10.75 PSF. Keep in mind that rental rates are also subject to annual escalations. We have seen a further increase in net rental rates across the board further into double-digit territory, depending on a number of factors, such as building size, location, ceiling height, etc. Based on the increase of value of industrial land, infill sites, construction costs, etc… we can only see these rates continue to grow. Overall, we are still in a Landlord’s market. 
2. Property Values: While we don’t have an applicable weighted average asking sale price for the Toronto-North markets this quarter due to almost zero inventory, property values remain in line with the previous trend. This was shown by the average sales price for completed transactions. That being said, each building is unique, and it really depends on the size and location. CAP rates are still somewhere between 4.5% to 4.75% but it really depends on the rental rates in place. If we have older rental rates with immediate growth potential, then CAP rates could end up below 4%. 
3. Development Opportunities: The Toronto-North markets still have quite a bit of land available for development in Vaughan-West along Highway 50. We are also going to see further development along Highway 400 as land sites in more central areas become more scarce. Regarding industrial land, pricing generally continues to increase. 

Conclusion:

Goran Brelih, SIOR

Senior Vice President, Broker
Cushman & Wakefield ULC, Brokerage.
www.cushmanwakefield.com
www.siorccc.org

Office: 416-756-5456
Mobile: 416-458-4264
Mail: goran.brelih@cushwake.com
Website: www.goranbrelih.com