Scanning across the six largest industrial real estate markets in Canada over the past three years, one metropolitan area stands out as a bit of a mystery. While vacancy rates have fallen across the board (with the exception of a slight rise in Ottawa), only Toronto has been unable to increase its rental rates.
Toronto looks ready to pop up. “There was nine million square feet (of industrial space) that has been absorbed and vacancy has gone down 1.5 percentage points, logic says to me that rental rates have to come back up,” said Jim McIntosh, Colliers International senior vice-president of investment sales who sells industrial property on the investment side. “I continue to predict and forecast that they have to turn the corner and go back up.“
Colliers is now seeing signs that Toronto may be rebounding, if not exactly catching up, with the national trend to higher rents of the past two years. “Our leasing agents across the city say that (rental rates) already have gone up,“ said McIntosh. “The deals that we are doing now, deal by deal analysis, are higher than they were a year ago. We think we have turned the corner.“
The GTA`s average rental rate according to Colliers data is below $5 per square foot as of the third quarter of 2011, which is lower than rents were in the dark days of the fall of 2009. “That $5 rental rate in Toronto is probably a $6 or $7 rental rate in Calgary or Edmonton,“ he said. “That is where we should be for people to make money.“
According to Colliers data, the most expensive industrial space in the country is in Calgary at an average of $8 per sq. ft., followed by Edmonton, Vancouver and Ottawa all averaging above $7 per sq. ft. Like Toronto, average rents in the Montreal market are below $5 per sq. ft.
If not quite impatient, the Colliers executive considers the Toronto turnaround a bit overdue. In fact, his firm originally forecast that about 5 million square feet of new industrial building would be built in the GTA in 2011. In fact, that figure will be closer to 3 million for the year. McIntosh remains optimistic that Toronto will rebound in the next four years adding 4 million square feet in 2012, 5 million in 2013, 7 million in 2014 and 9 million square feet of industrial space in 2015.
Looking at historical trends, the firm is not really going out on a limb. Traditionally, the GTA market has added 10 million sq. ft. of new industrial space annually. Colliers estimates that the GTA market needs to build 7.5 million square feet of space every year just to keep the 750 million sq. ft. market stable. “We are way low,“ said McIntosh. “We are not building anything, relative to the market.“
Regardless of what happens in Europe or the United States in the short term, Colliers is counting on an improving Canadian economy. A GTA turnaround is predicated on continued immigration of about 100,000 people per year to the Toronto area. “We just believe with a reasonably good economy and all that growth that we have to build space and that is the basis of my logic. We are going to bring in two million people over the next 20 years which increases our population by over 30%. I just don’t see how we can`t build the space to move the televisions and refrigerators for them.“
In terms of investment sales activity, the GTA market still has a ways to go to match the overall volume of sales of $2.57 billion (in deals valued over $1 million) in 2007 compared with $1.34 billion for the first three quarters of 2011. The trend, however, is improving. “In overall volume of sales 2007 was higher but this is the best year since 2007,“ said McIntosh.
The most active buyers in the industrial market in the GTA and nationally have been the big pension funds, said the Colliers executive. “Overall market, across Canada and even in Toronto, the REITs have been quite active. The ones that were quieter this year have been the private buyers. They never play a big role in an active market. They usually come in early when they see value and then go quiet as the market recovers and that is what they have done.“