Establishing True Valuations Across Differing Markets
November 10th, 2023
“In the classic old business cycle, there would be a diminution in sales; it would take a little while for this information to reach corporate headquarters. And there would be an inventory pileup. And then – bam – businesses would react, sometimes violently, by cutting production.”
Alan Blinder, Professor of Economics, Princeton University
While we cannot say that economic conditions have impacted businesses quite so deeply or universally across geographic markets, there has undoubtedly been a pullback in space needs by industrial users; specifically warehousers that expanded aggressively during the post-pandemic boom.
Although these shelved plans or sublet spaces may not be large in number, when they do hit the market, they’re at hundreds of thousands of square feet at a time – due simply to the scale of the operations shedding them.
At the same time, we have seen record levels of new deliveries on the mid- to tail-end of the GTA industrial market’s largest-ever construction pipeline.
Looking back just a single year, the Greater Toronto industrial market had only 0.8% of availability across its 800-million-plus of inventory.
Today, that figure has more than doubled to 1.9%; still well below the ‘equilibrium’ rate of approximately 4 percent, but – nonetheless – a significant uptick and reversal of its previous trajectory.
Meanwhile, the bite of borrowing costs has gutted industrial sales volumes and resulted in the dissuasion or deferral of purchasing decisions for stakeholders whose primary strategy lies outside of deploying dry powder. Despite the holding pattern by Central Banks, the damage has already been done; a move deemed necessary to combat accelerating inflation.
Now that both inflation and expectations of future rate hikes seem to be diminished, we can expect more stability in pricing and costs. Stability is good. Flat – or slowly declining – rates means businesses can more accurately forecast their financials and budget for their real estate expenses and investments. It also helps investors regain confidence.
The only question remaining is – going back to the quote above – what the long-term impact of diminished consumer demand may have on the market. Because, up until now, most newsworthy sound bites have revolved around e-commerce or logistics giants letting go of one or two facilities in the region to rightsize their footprints.
However, will these decisions be replicated by small- and medium-sized enterprises? And, with many 5- and 10-year lease renewals coming due in 2024 at significant increases right as we see – for the first time in a long time – a modicum of available space, will rents finally see some downward pressure?
How this plays out remains to be seen. Well-capitalized businesses will continue to make bold moves. Aggressive investors will deploy capital to scoop up income-producing assets. And well-oiled developers will be bringing to market some of the largest, modern, high-clear facilities we’ve ever seen. What we may begin to see, however, are more challenges, more time needed to transact, and a more balanced dynamic for buyers and tenants.
So with that said, let’s examine how each of the Greater Toronto Area regions performed in Q3 2023, and where we expect the market to go moving forward.
Key Takeaways from Q3 2023 – Toronto North Markets
The availability rate increased from 1.1% to 1.2%, with a lease availability rate of 1.2% and a sale availability rate close to 0% (53,501 SF out of 159M SF of inventory);
We had 107,200 SF of new supply and 1,930,222 SF still under construction;
We had negative absorption of 212,397 SF;
The weighted average asking net rent was $18.81 PSF, down from $18.98 PSF the previous quarter, with additional rent of $4.71 PSF (a decrease from $4.82 PSF); and
The weighted average asking sale price increased from $468.76 PSF to $552.64 PSF.
Why are the GTA North Markets in such demand?
Generally, the Toronto-North markets have newer product with higher ceiling heights and better shipping access. Further, there are benefits from access to major transportation routes.
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, Aurora, Newmarket)
Statistical Summary – GTA North Markets – Q3 2023
Q3 2023 GTA Industrial Market Overview – Source: Cushman & Wakefield
Q3 2023 Industrial Market Overview – Source: Cushman & Wakefield
So let’s take a closer look at how the different Toronto North Markets performed during Q3 2023…
GTA North Markets (Vaughan)
Properties Sold between July 2023 – September 2023, from 20,000 SF plus
In Vaughan in Q3 2023, a total of 7 properties were sold (totalling 698,859 SF); 5 were investment sales and 2 were user sales. The prices achieved were in the range of $284 PSF – $362 PSF, with an average building size of 99,837 SF and an average price of $312 PSF.
81 Royal Group Cres, Vaughan
GTA North Markets (Vaughan)
Properties Leased between July 2023 – September 2023, from 20,000 SF plus
In Vaughan in Q3 2023, 11 properties were leased (totalling 1,122,920 SF). The net rental rates achieved were from $15.76 PSF to $20.00 PSF, with an average building size of 102,084 SF and an average net rental rate of $19.02 PSF.
336 Courtland Avenue, Vaughan
GTA North Markets (Markham/Richmond Hill)
Properties Sold between July 2023 – September 2023, from 20,000 SF plus
In Markham and Richmond Hill in Q3 2023, a total of 3 properties were sold (totalling 135,431 SF); 2 were investment sales and 1 was a user sale. The prices achieved were in the range of $350 PSF – $410 PSF, with an average building size of 45,144 SF and an average price of $382 PSF.
35 Valleywood Drive, Markham
GTA North Markets (Markham/Richmond Hill)
Properties Leased between July 2023 – September 2023, from 20,000 SF plus
In Markham and Richmond Hill in Q3 2023, 7 properties were leased (totalling 312,466 SF). The net rental rates achieved were from $17.25 PSF to $19.50 PSF, with an average building size of 44,638 SF and an average net rental rate of $18.36 PSF.
4011 Fourteenth Avenue, Markham
GTA North Markets (Aurora/Newmarket)
Properties Sold between July 2023 – September 2023, from 20,000 SF plus
In Aurora and Newmarket in Q3 2023, just 2 properties were sold (totalling 116,524 SF); an investment sale and one user sale. The prices achieved were in the range of $231 PSF – $349 PSF, with an average building size of 58,262 SF and an average price of $290 PSF.
150 Pony Drive, Newmarket
GTA North Markets (Aurora/Newmarket)
Properties Leased between July 2023 – September 2023, from 20,000 SF plus
In Aurora and Newmarket in Q3 2023, just one property was leased – a 28,568 SF property at a net rent of $16.75 PSF.
20 Allaura Boulevard, Aurora
What Lies Ahead:
Rental Rates: The Toronto-North markets now have a weighted average rental rate of $18.81 PSF net, the second-highest across the GTA regions (behind the GTA West at $19.27 PSF). That said, rents have levelled off and, in some cases, we have seen rate reductions. We expect this to continue. Likewise, annual rental escalations have plateaued and may decrease. Leasing is slower and it is taking longer to complete a deal as Tenants have become more cautious. Finally, as vacancies increase and we see negative absorption, Tenants are beginning to have options, which may spur more movement and breed competition, putting more downward pressure on rents, specifically in Class B or C industrial buildings. Overall, we are heading towards a more balanced market between Landlords and Tenants.
Property Values: The Toronto-North markets have the highest weighted-average asking sale price across the GTA at $552.64 PSF, due to the lack of availabilities and cost to construct. However, as rental rates plateau, and as we see rents decrease in certain properties, coupled with upward pressure on cap rates, we are going to see a decrease in the value of investment properties. For users, even though the Buyer pool may have thinned due to increased interest rates, we expect to see values remain elevated as supply is extremely limited. Finally, due to the aforementioned interest rates, the value of development land has decreased.
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.
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 with our rental rates and valuations at all-time highs, and vacancy rates low, finding the right property is a real challenge.
Having said that, a lot of transactions are being done off the market.. and to participate in that, you should connect with experienced brokers that have long-standing relationships with property owners.
For a confidential consultation or a complimentary opinion of value of your property please give us a call.
Until next week…
Goran Brelih and his team have been servicing Investors and Occupiers of Industrial properties in Toronto Central and Toronto North markets for the past 30 years.
Goran Brelih is an Executive Vice President for Cushman & Wakefield ULC in the Greater Toronto Area.
Over the past 30 years, he has been involved in the lease or sale of approximately 25.7 million square feet of industrial space, valued in excess of $1.6 billion dollars while averaging between 40 and 50 transactions per year and achieving the highest level of sales, from the President’s Round Table to Top Ten in GTA and the National Top Ten.
Specialties:
Industrial Real Estate Sales and Leasing, Investment Sales, Design-Build and Land Development
About Cushman & Wakefield ULC.
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 53,000 employees in 400 offices and 60 countries.
In 2020, the firm had revenue of $7.8 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com.
For more information on GTA Industrial Real Estate Market or to discuss how they can assist you with your real estate needs please contact Goran at 416-756-5456, email at goran.brelih@cushwake.com, or visit www.goranbrelih.com.
Connect with Me Here! – Goran Brelih’s Linkedin Profile: https://ca.linkedin.com/in/goranbrelih
Goran Brelih, SIOR
Executive Vice President, Broker
Cushman & Wakefield ULC, Brokerage.
www.cushmanwakefield.com
Office: 416-756-5456
Mobile: 416-458-4264
Mail: goran.brelih@cushwake.com
Website: www.goranbrelih.com
