Market Conditions – GTA Industrial Market
Demand for industrial space in the Greater Toronto Area (GTA) moderated for two consecutive quarters before losing all momentum in the second quarter of 2012. The availability rate rose 20 basis points (bps) this quarter to 5.5%, which is the first increase since the thirds quarter of 2009. Demand was flat in the Toronto North, Central and East markets; however, there was a significant increase in the amount of available space in the Toronto West market, which can be partly attributed to three new spec developments. Overall, the GTA industrial market remained relatively stable in the face of slowing global economic growth. One dominant trend for the over five years has been strong demand for modern logistics and warehouse facilities, particularly those with clear heights in excess of 26’. There was a pause in leasing demand in this category this quarter, as the amount of available space with clear heights >26’ increased by 2.2 million SF, 2.0 million SF of which was located in Toronto West. Surprisingly, the amount of available space in lower clear height buildings continued to decrease this quarter. As a result, there was marginal positive absorption in the markets outside of Toronto West where there is a smaller concentration of logistics and distribution users. These new market dynamics appear to be tied to the recent uptick of construction activity. For the last three years, large, high clear height spaces have been difficult to find, which has spurred design-build construction. As a result, the amount of space under construction has increased by 4.0 million SF since the first quarter of 2011 to 4.5 million SF this quarter. It appears as though the increase in new construction is poaching demand from the leasing market. A few large, high clear height buildings came back to the market and were not absorbed immediately. This pause in leasing demand is not expected to continue and a number of developers are slated to initiate additional speculative projects in the coming months. Global headwinds caused demand for GTA industrial space to moderate over the last year and downside risks continue to mount. Global events have the potential to halt the recent increase in net asking rental rates. Asking rents have climbed for two consecutive quarters and now average $4.69 psf. Landlords may have to alter their rent expectations going forward; however, the overall asking sale price has already adjusted, falling $3.25 psf quarter-over-quarter (q/q) to $ 83.55 psf. The direction of both rents and sale prices will largely be determined by external events that look unlikely to instill confidence and bolster demand for space in the near-term.