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Space crunch, rising rents continue to dominate GTA industrial market

The Greater Toronto Area industrial market continues to set new highs for rental rates and new lo...

IMAGE: The Dixie Rd. corridor is one of the GTA's most expansive industrial districts. Even with an inventory of 901 million square feet, the GTA is experiencing a serious shortage of vacant space, and rapidly rising rents. (Google Maps)

The Dixie Road corridor is one of the GTA’s most expansive industrial districts. Even with an inventory of 901 million square feet, the GTA is experiencing a serious shortage of vacant space, and rapidly rising rents. (Google Maps)

The Greater Toronto Area industrial market continues to set new highs for rental rates and new lows for available space as the unrelenting demand for distribution and warehouse space continues.

Avison Young’s latest data, contained in its newly released Q3 2021 industrial report, shows vacancy at just 1.2 per cent across the GTA, the average rental rate at 11.63 per square foot, and only 13 properties with at least 250,000 square feet available anywhere in the region.

“The Greater Toronto Area (GTA) industrial market remains resilient, despite challenges in other sectors. This has translated to exceptionally strong leasing and investment activity (and compressed cap rates) as well as increased competition for short-term developable land and infill sites,” the report states. “Rental rates have continued to climb as demand outpaces supply – driving activity and interest in fringe markets surrounding the GTA.”

JLL’s Q3 Toronto industrial report offers a similar analysis. It reports vacancy at one per cent and year-to-date net absorption of 13.5 million square feet.

“As the market continues to tighten, large blocks of leasable space have become very rare. Available spaces over 100,000 square feet in existing industrial buildings dropped almost 30% since last quarter,” the JLL report states. “As these last few spaces get leased up, major tenants are increasingly looking at longer timelines in search of space.”

Industrial rents up 74% in five years

According to the AY Data, GTA rents have increased 74 per cent during the past five years and there was 12 per cent growth in year-over-year net asking rents.

The demand is driving a spike in investment activity as well, with AY citing $2.5 billion in transactions during the quarter – a 79 per cent increase over Q2. Year-to-date, the sector has seen a record $5.4 billion in investment activity, already surpassing the 2020 mark of $4.6 billion.

The activity was inflated by one of the largest sector sales in recent years, with Pure Industrial Real Estate Trust closing on its acquisition of a $697-million portfolio ($298 per square foot) from Artis REIT. Even with that transaction removed, however, the sector still would have recorded $1.8 billion in transactions.

The most active areas were Brampton and Mississauga with each seeing over $500 million worth of assets change hands. Industrial activity accounted for 36 per cent of the total investment activity across all sectors in the GTA during the quarter.

The demand continues to drive cap rates lower, AY says. Single-tenant properties dropped 20 basis points during the quarter to 3.8 per cent, while multi-tenant assets dipped 10 bps to 4.1 per cent.

“Demand for industrial product is expected to remain strong for the remainder of 2021, especially since ongoing mass vaccinations have allowed Ontario to reopen much of the economy, giving investors greater confidence in the future,” the AY report states.

Major leases and completions

Leasing activity was led by retailer H&M taking a 716,000-square-foot space at Salem Road and Kerrison Drive in Ajax in the GTA East sector, which is seeing more activity as land and properties in other submarkets becomes harder to access. The property will be part of Blackwood Partners and Crestpoint’s GTA East Industrial Park.

JLL reported two other leases on properties which had yet to break ground: Aritzia signing a deal for 550,000 square feet at a Zzen group site in Vaughan, while General Mills took 550,000 square feet at Orlando’s Milton South development.

Looking ahead, there is 13.9 million square feet of space under construction according to Avison Young, about half of it pre-leased. The pre-development pipeline is about 53.5 million square feet across 152 buildings.

Buildings under construction will add about 1.5 per cent to Toronto’s total inventory of 901 million square feet, while the pre-development pipeline would expand it by about six per cent if all are constructed.

The AY report notes infill developments are becoming more common, including properties which are being demolished in favour of larger and/or more modern facilities. One of the largest is 541 Kipling Ave., a 337,200-square-foot spec redevelopment by Edmonton-based ONE Properties.

Two of the largest completions during the quarter were also in the East submarket, AY reports: a 1.05-million square foot distribution centre delivered for Amazon at 333 Rossland Rd. E. in Ajax; and the 400,000-square-foot AOSOM Canada facility at 883 Thornton S. Rd. in Oshawa.

New development to take time

Of the 2.4 million square feet of completions across the GTA, a total of nine buildings, 95 per cent of the space was already leased.

The JLL report indicates there won’t be any quick fix to the current space crunch

“Bringing planned product to market at a rapid pace continues to be difficult. Scarcity of zoned and serviced land and lengthy municipal approval processes have continued to challenge developers,” it states. “Recently, material shortages have also become a major hurdle due to pandemic related supply chain disruptions.

“This is often leading to significant construction delays in a market that urgently needs new product.”

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