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TO industrial sale prices ‘unprecedented’: AY’s Hillis

David Hillis, who brings 33 years of industrial and office investment sales and leasing experienc...

David Hillis, who brings 33 years of industrial and office investment sales and leasing experience to his new role as Avison Young principal, has completed more than 1,100 industrial transactions in the Toronto market.

David Hillis of Avison Young.

David Hillis is a new principal, specializing in the industrial real estate market, at Avison Young in Toronto. (Photo courtesy Avison Young)

With that type of background, the former CBRE senior vice-president, now based in Avison Young’s Toronto West office, has a solid perspective on what’s happening in the Greater Toronto Area (GTA) industrial real estate market — the third-largest in North America.

“Sale price escalation in the last 36 months is unprecedented in the span of my career,” said Hillis. “Vacancy rates are down right across the GTA to historical lows.

“Occupiers are prepared to pay premium values to own their real estate.”

Property values can be higher for vacant buildings

At current net lease rates and expected cap rates, Hillis said property values are higher for vacant industrial buildings than income-producing properties, which has induced some investors to sell assets into the occupier market at the time of lease expirations.

“In this market, advantages go to those purchasers whose brokers can act quickly and confidently to source opportunities that have not yet been exposed to the open market. 

“On the flip side, advantages go to those property owners whose brokers can widely expose their property to the specific purchasers and tenants who have special needs for their property’s unique attributes.”

In contrast to current sale prices, net lease rates in the GTA have remained much the same, with only minor increases, for decades. Overall occupancy costs for tenants have increased, however, due to an escalation in additional rents (which include taxes, maintenance and insurance plus management fees) over the same period. 

“Lease rates have been kept low relative to other major North American markets due to the highly competitive market in the GTA,” said Hillis. “I believe conditions on the supply side are now right for net lease rates in the GTA to finally rise, and we are likely to see this over the near term unless potential interest rate hikes or other factors change prevailing optimism.”

High land prices and development charges

While the average time on the market for an industrial building is a fraction of what was a normal 12-month marketing period, Hillis said it’s difficult for developers to expect reasonable returns on new construction with land at prevailing prices of more than $1 million per acre and development charges of more than $20 per square foot.

“Most speculative new construction is occurring in the Highway 401 corridor west to Milton in the divisible big-box distribution-style format, typically over 400,000 square feet with minimum 32-foot clear ceilings, wide staging bays and provision for trailer parking. The emergence of LED lighting contributes to energy-efficient design.”

While most of the activity has focused on the west end of the GTA. there’s been a resurgence of projects in Scarborough and points east, as well as north of the 407 along the 404 and 400 highways.

Growth in the GTA industrial real estate market can be attributed to a number of factors:

* e-commerce companies’ increasing distribution facility needs;
* low interest rates;
* American economic growth driving stronger demand for Canadian goods and services;
* and a lower Canadian dollar discounting the cost of those goods and services for international purchasers.

Hillis’ role at Avison Young

Toronto-headquartered Avison Young is the world’s fastest growing commercial real estate services firm. The 39-year-old company is comprised of 2,400 employees in 80 offices who provide investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-family properties.

Hillis’ role with Avison Young will focus on industrial sales and leasing throughout the GTA and the rest of Ontario. He’ll negotiate single-property and portfolio acquisitions, dispositions and leasing transactions while attracting new clients and maintaining existing relationships.

He’ll also assist in mentoring and recruiting up-and-coming real estate professionals.

“I believe my clients can take advantage of the insight and intuition I’ve gained through my share of battle scars and successes,” said Hillis. “I’m excited and energized to join Avison Young and be a partner in the growth of a private entrepreneurial company based here in Canada, but with an international presence.”

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