The transaction closed on Monday, nine months after QuadReal got the site under contract in February. It paid $115 million for the property, which backs onto Toronto Pearson International Airport and is bisected by Etobicoke Creek. It is estimated to have about 35 acres of developable land and also fronts onto Dixie Road.
“Lots of investors have been trying to pry it loose for a long time,” said QuadReal director of investments Ed Lam in an exclusive interview with RENX. “We’re excited to begin working on this property and look forward to building first-class industrial space in this fantastic location.”
The land had been held by a private family for over 70 years, and the multigenerational ownership presented a number of challenges in getting the transaction finalized. Lam believes QuadReal’s straight-forward approach was a key factor in its success.
QuadReal developed relationship with vendor
“Ultimately, we worked closely with the vendor to build a mutual understanding of deal issues. We approached the transaction with full transparency and with fair consideration of the vendor’s concerns,” he explained, noting QuadReal was up-front about how much of the land can be developed, ecological constraints and restrictions posed by its proximity to the airport – it literally backs onto a main east-west runway.
“As a vertically integrated institutional owner/operator, QuadReal takes a long-term approach to vendor, broker and tenant relationships. Trust is a two-way street and this was a textbook example of how we executed a deal that was a win for all parties involved.”
“Every major industrial developer has wanted to buy this, unsuccessfully. Many have tried,” Boussoulas told RENX, noting there were “high fives” all around when it closed. “This is unquestionably a trophy employment land property.”
Year-long process led to decision to sell
Boussoulas met the vendor through a mutual friend and thus began a year-long process to facilitate the sale. He brought longtime friend Pitt onboard and they initiated an off-market process to find a suitable buyer.
Because it was not formally on the market, and because the owners had spurned all previous offers for decades, Boussoulas said some potential buyers were skeptical.
“Everybody wanted to buy this (but) Bill and I, between us we spoke to everybody and they didn’t even want to offer on it because they were, ‘Oh, that will never happen.’ ” he said. “Just about everybody didn’t want to bother, unless we actually listed it and took it to market. They said, ‘it’s just impossible, it can’t done, because we’ve all tried.’
“But we did.”
The Derry and Dixie property
The property currently contains a Husky gas station on the northeast corner, which will remain in place. A small retail building beside the gas station and a small-bay industrial plaza fronting Dixie Road will be demolished to make way for the new buildings when their leases expire, Lam said.
“Our plans are to build three buildings, roughly 660,000 square feet,” he said. “The development timeline from start to finish – and it’s really variable based on what the leasing market is like – but we are conservative and we think that when it’s all said and done and completely stabilized it will be about five years.”
Lam said QuadReal must still determine exactly how many acres can be developed, which will be done in conjunction with the Toronto Region Conservation Authority after a detailed assessment. There will also be a height restriction for a portion of one of the buildings, due to the adjacent runway.
Due to its location near the airport, major highways and in the heart of one of the GTA’s most intensive industrial areas, the range of potential tenants is very wide. This includes firms which require proximity to air freight, or bonded operations.
QuadReal plans to hold on to property
“There is a very strong possibility the value could become much greater if this were to become a bonded warehouse,” Lam said. “But in terms of the real height for the rest of what we call spec product, our standard at QuadReal right now is that everything targets 40-foot clear.
“We bought the site to own for 50 or 100 years. We are just trying to future-proof it without (impacting) our returns today, so we are targeting 40-foot clear. If we get a user who is really interested in the site, if they want a warehouse, or whether it’s multilevel, we will explore all those options over the next two years.”
Boussoulas said while the purchase price might seem steep, the property has already appreciated in value.
“This is like the Yonge and Bloor of industrial,” he said, citing one of the most coveted downtown intersections for commercial real estate. “When we look at rental rates today for industrial, we are starting to see deals in the upper teens and we believe in the next two to three years industrial rents could touch $20 a square foot.
“You might think, ‘Oh my god I can’t believe what they paid for it.’ The reality is from the time they went under contract until today, it’s worth a lot more. The rates are what drives everything.”
Severe space crunch in GTA
Pitt concurred, noting there is almost no space available in the heavily-industrialized corridor which leads into Brampton. Vacancy is at one per cent or less across the region.
“Mississauga is considered probably centre ice for industrial products. The industrial fundamentals now, being that it’s one per cent or less vacancy rate and the rental rates are rising on a quarterly basis, since 2015 the rental rates have increased 15 per cent per annum,” he said.
“Groups like QuadReal are creating their build-to-core strategies. They’re saying ‘where do we find land, and where are the tenants going?’ The tenants and occupiers are very robust in Mississauga and Brampton and Milton, call it GTA West, (but) there is a finite amount of serviced ready-to-go land in Mississauga. Land has almost doubled in the last 24 months.”
Pitt and Boussoulas are both veterans in the Toronto commercial real estate market, and both also have extensive industrial backgrounds. They agree the market today is as hot as it has ever been during their time in the business.
“More bullish” on industrial than ever
“I’m a little bit conservative by nature so I’ve always, for the last five years, said lease rates are tapped out, and there’s going to be a correction,” Pitt said. “Now as we finish the year I’m more bullish about the industrial landscape than I’ve ever been.
“This deal appears to be frothy on a per-acre price but given the location I think QuadReal is going to do just fine and by the time the building is built they might get $20 rents.”
Lam said with most of the industrial product in the area having been built in the 1960s or 1970s, there is a chance to add a premier, modern space to the market.
“This is where Torbram (Road) starts. This is where Bramalea Road starts, and if you look at the industrial product around the airport, 18-foot clear, 20 and 22, it’s really a cross-section of the different timelines in which product was built,” he said.
“We are surrounded by product that was built in the 1960s, and this is going to be a crown jewel that will tower over everything else.”