September 2008 and the collapse of Lehman Brothers marked the beginning of a terrifying financial collapse that rocked investor confidence and still affects markets and investor sentiment today.
To better understand how the 2008-09 financial crisis and recession rippled through the real estate market, Toronto-based American Appraisal Canada decided to look at one real estate class in one particular region: industrial real estate in the Greater Toronto Area. (Graphs copied from the American Appraisal Canada study.)
Based upon dollar volume, market activity has not yet returned to the levels achieved in 2007. Total industrial real estate sales declined to $947 million in 2009, a stunning plunge of approximately 60 per cent from $2.4 billion in 2007. The market began trending upwards in 2010, recording sales of $1.8 billion in 2012. Activity during the first half of 2013 suggests continuing recovery.
In 2012, general purpose light industrial real estate accounted for 61% of the total dollar value of all GTA industrial real estate sales, a significant increase from 35% in 2007. It is too early to proclaim a permanent market shift, but nonetheless, it’s important to note there were more transactions of smaller-sized properties in 2012 than in any other year of the study period.
Sales are back
Looking at sales volumes, American Appraisal sees “a full market recovery.” The number of sales (each of which could represent more than one building or property) followed a similar trend: 2009 was the slowest year for the GTA overall, but by 2012 the markets had improved and surpassed the 2007 peak.
Unit prices also support the contention the recovery in GTA industrial continues. In 2007, the average was $84 per square foot, a measure that reached a bottom of $65 in 2010. By 2012, the industrial real estate market had climbed to $76, and by mid-2013 it had finally returned to its 2007 price levels. Once we factor in inflation, we see that unit price is still slightly short of full recovery; the benchmark would be $94 per square foot in 2013.
“When you look at it from an inflation perspective, the average per square foot costs have not returned to an inflation-adjusted 2008 dollar and you are seeing a reduced size of building,” said Herb Saunders, president and national managing director of American Appraisal Canada.
Industrial moving west
Perhaps the most surprising discovery of the five-year study was the dramatic shift of industrial real estate and tenants to the west side of the GTA. That has resulted in the greatest price gains for areas such as Halton and York.
“I have been driving into downtown Toronto for years and I used to envy all the people who worked in Mississauga or Oakville because I would look over and see them driving at 120 kilometres an hour while I was inching along,” said Saunders. “About three or four years ago, we reached the tipping point and there are actually more people commuting out of downtown Toronto.”
Those commuters streaming west out of the city are partly a function of what is going on in the industrial real estate sector, explained Saunders. “Toronto is a very mature area, there is not a lot of development land left and there has been a tendency among new entrants to the GTA to want to locate closer to arterial roads and away from the congestion of the GTA.”
The study also underlines a shift in industrial usages as the average size has been decreasing, which hints at major changes in the GTA and overall Canadian economies.
“It speaks to a transition in our economy away from the large manufacturing facilities into much smaller, more assembly oriented users. You have a bifurcation into colossal distribution centres and much smaller assembly facilities or service type activities.
“The study is really confirming the de-industrialization of the GTA.”
In 2012, general purpose light industrial accounted for 61% of the total dollar value of all GTA industrial real estate sales, a significant increase from 35% in 2007. American Appraisal said it is too early to proclaim a permanent market shift, but also noted there were more transactions of smaller-sized properties in 2012 than in any other year of the study period.
For the purposes of its study, the firm grouped sales into four categories: purpose-built, owner-occupied, special-use facilities; distribution warehouse centres; general purpose storage/shop buildings; and manufacturing/assembly plants.
When analyzing the sales of individual regions, however, the firm focused on general purpose light industrial properties, the market segment responsible for the largest number of transactions within the regions. This approach removed distortions which would otherwise have been caused by the relatively few sales of special use, or mega distribution facilities.
In 2012, general purpose light industrial real estate accounted for 61% of the total dollar value of all GTA industrial real estate sales, a significant increase from 35% in 2007.
Looking at the number of properties sold, American Appraisal sees a full market recovery. The number of sales (each of which could represent more than one building or property) followed a similar trend: 2009 was the slowest year for the GTA overall, but by 2012 the markets had improved and surpassed the 2007 peak.
- Although the total value of GTA’s industrial sale transactions is currently less than it was
in 2007, the quantity of sales has surpassed pre-recession levels, indicating a decline in average building size being purchased, from 69,063 square feet in 2007 to 52,455 square feet in 2012.
- By mid-2013, the average unit sale price for all industrial real estate had recovered to 2007 levels, but the unit price of general purpose light industrial had achieved an 11% increase over 2007 levels. This appears to be attributed to the price growth in Halton and York Regions.