Investment Opportunities in Toronto's Tight Industrial Market

  1. The Greater Toronto Area (GTA) is Canada’s largest city and a central economic hub with a robust industrial sector due to its strategic location, transportation infrastructure, and diverse economy.
  2. The GTA’s industrial market benefits from its well-developed transportation infrastructure, including major highways, rail networks, airports, and ports, making logistics and distribution operations attractive.
  3. The Toronto industrial real estate market includes various properties, such as warehouses, distribution centers, manufacturing facilities, and flex spaces.
  4. Population growth, e-commerce expansion, logistics, supply chain requirements, and increased manufacturing activities have driven strong demand in the Toronto industrial real estate market.
  5. The high demand has resulted in limited availability of industrial properties in prime locations, especially in the GTA West markets, leading to increased competition and rapidly rising lease rates.
  6. Prime industrial locations such as Brampton, Mississauga, and Vaughan, along with newer, well-equipped facilities, command higher rates due to high demand and limited supply.
  7. Vacancy rates have compressed to around 1%, with a healthy positive annual net absorption of 6.4 million SF, making leasing tight as large blocks of quality space become scarcer.
  8. The market strain has driven rents to increase by 16.4% year over year in the GTA, reaching a record high of $18.80/SF on average, with the national average at $16.50/SF.
  9. Geographic restrictions within much of the GTA, such as the Greenbelt, have limited industrial development, forcing developers to look beyond the GTA limits into the Greater Golden Horseshoe for new development opportunities.
  10. The Toronto industrial real estate market is expected to continue experiencing demand growth due to e-commerce expansion, population growth, and evolving supply chain dynamics. Still, the availability of developable land and potential zoning restrictions may challenge new development.

    Strategic Location and Economic Hub

    The Greater Toronto Area (GTA) is Canada’s largest city and a major economic hub. It has a robust industrial sector due to its strategic location, transportation infrastructure, and diverse economy. The GTA’s industrial market benefits from its well-developed transportation infrastructure. Its proximity to highways, rail networks, airports, and ports makes it an attractive location for logistics and distribution operations.

    Diverse Industrial Real Estate Market

    The Toronto industrial real estate market includes various types of properties, including warehouses, distribution centers, manufacturing facilities, and flex spaces. The market is a vital component of the GTA’s real estate sector, supporting a range of industrial activities essential for the economy.

    Strong Demand Drivers

    Several factors have driven strong demand in the Toronto industrial real estate market. These include population growth, e-commerce expansion, logistics, supply chain requirements, and increased manufacturing activities. The rise of online retail has mainly fueled the demand for large-scale warehouses and distribution centers. High demand has led to limited availability of industrial properties, especially in prime locations.

    Prime Locations and Lease Rates

    Prime industrial locations such as Brampton, Mississauga, and Vaughan command higher lease rates due to the high demand and limited supply of properties. These areas are close to the airport and transportation networks linking urban centers. Newer, well-equipped facilities in these locations also see higher rates.

    Compressed Vacancy Rates

    Vacancy rates have compressed to around 1%, with a healthy positive annual net absorption of 6.4 million SF. Leasing continues to be tight as large blocks of quality space become scarcer. Increasing demand and construction delays have led landlords to emphasize covenants. They often turn away potential tenants for offers with better credit and financials.

    Rising Rental Rates

    The strain on the market has increased rents by 16.4% year over year in the GTA. The average rent has reached a record high of $18.80/SF, with the national average at $16.50/SF. As competition for space increases, particularly in the logistics sector, rents will continue to grow. This trend will likely change if developers construct more large bay industrial space.

    Geographic Restrictions

    Geographic restrictions within much of the GTA, such as the Greenbelt, have limited industrial development. These areas include the Oak Ridges Moraine, the Niagara Escarpment, and the Rouge River Valley. Developers are forced to look beyond the GTA limits into the Greater Golden Horseshoe. They seek pockets of land with access to highways, rail lines, and labor pools.

    Future Demand and Challenges

    The Toronto industrial real estate market is expected to continue experiencing demand growth due to e-commerce expansion, population growth, and evolving supply chain dynamics. However, the availability of developable land and potential zoning restrictions may pose challenges. Creating new developments might become increasingly difficult.

    Robust Leasing Fundamentals

    Leasing fundamentals leading into the pandemic were robust in the GTA. Many tenant groups competed for space, including logistics, e-commerce, retailers, and manufacturers. They aimed to be close to Toronto’s large labor force and extensive network of highways. Vacancy for each type of industrial tenant remained below the national average in Toronto.

    Pandemic Impact on Demand

    Demand increased as the pandemic encouraged many tenant types to occupy more space. This was to meet supply chain requirements. The probability of leasing available space fell to 3.8 months, compared to 4.4 months before the pandemic. Industrial demand has shown no signs of cooling, with a net absorption rate of 8.7 million SF.

    E-commerce Growth

    The growth of e-commerce, especially during the pandemic, has increased demand for ample warehouse space. Large retailers like Amazon, Walmart, H&M, and Shein have expanded their footprints in the GTA. Amazon almost doubled its GTA footprint in 2022, securing about 3.3 million SF across 12 facilities. Walmart Canada is investing $3.5 billion over the next five years, including a new 550,000-SF distribution center in Vaughan.

    Continued Expansion

    H&M signed for 716,650 SF on the east end of Ajax’s new GTA East Industrial Park. Walmart took an additional 56,000 SF at a property on Finch Ave. E., along with 550,000 SF in a Vaughan development. These expansions highlight the ongoing demand and strategic importance of the GTA industrial market.

    Geographic Constraints

    The Toronto market faces significant geographic constraints. Lake Ontario restricts expansion in the south, and the Greenbelt limits growth in other areas, including the Oak Ridges Moraine, the Niagara Escarpment, and the Rouge River Valley. These restrictions also limit new construction, especially in the west end near the airport.

    Municipal Approval Process

    The municipal approval process for rezoning and site plan applications is very demanding. Projects can take years to get approved. High and rising development costs further constrain potential new supply. This, combined with strong demand and competition from residential uses, has resulted in rapidly rising land costs.

    Limited New Deliveries

    The pipeline of new industrial deliveries within the GTA was just 3.1% of standing inventory. This is due to the various supply constraints. With limited new space available, demand continues to outstrip supply. This imbalance contributes to rising lease rates and tight market conditions.

    Shift to Speculative Construction

    Robust market demand has shifted new construction from built-to-suit to speculative projects. Analysts estimate that developers will complete 20 million SF of new space. Many developers start construction without securing a tenant, confident in existing demand. About 55% of the space under construction is available.

    Subdivision of Projects

    Developers are subdividing larger projects to attract more tenants. They use this approach for spaces nearing completion without signed tenants. Subdividing projects makes them appealing to a broader pool of prospective tenants, helping them fill the space more quickly and effectively.

    Construction Delays

    Recent construction delays have postponed some projects, pushing completions to late summer or early fall. Despite these challenges, developers navigate rising interest rates and construction costs. They delay pre-leasing to secure favorable rental terms in the future.

    Concentration of New Supply

    Year-to-date, new supply has been concentrated in the west end of the GTA. Milton saw over 1 million SF added with new buildings at 1820 Reading Court. Home Depot’s new Mississauga location at Avro Business Park added significant space. Pet Valu and Lululemon moved into their Brampton locations, adding 1.6 million SF.

    Rising Development Costs

    Rising development costs have impacted the pace of new construction. Higher costs deter some developers from starting new projects. Those that do proceed must factor in higher expenses, affecting profitability. Despite these challenges, demand for new industrial space remains strong.

    Strategic Location Benefits

    The GTA’s strategic location continues to attract industrial tenants. Proximity to highways, rail networks, airports, and ports remains a key advantage. This connectivity supports logistics and distribution operations, making the GTA an attractive market despite supply constraints.

    Future Market Outlook

    Analysts expect the Toronto industrial real estate market to continue growing. E-commerce expansion, population growth, and supply chain dynamics drive demand. However, geographic and regulatory constraints may limit new development. The market will need to balance these factors to sustain growth.

    Growing Demand for Industrial Property Investment

    Demand for industrial property investment has increased significantly in the past two years. The tight market and increased demand from e-commerce and logistics have benefitted owners. They can command top dollar for their industrial portfolios, allowing them to capitalize on profits and reinvest in larger existing properties or new developments.

    Major Investment Deals

    Summit Industrial Income REIT agreed to a $5.9 billion purchase by Dream Industrial and GIC. This cash deal includes a 31.1% premium. Tenants of Toronto-based Summit REIT, one of the country’s largest industrial landlords, are receiving $23.50 Canadian per unit. This demonstrates the strength of the GTA’s industrial market.

    High-Value Transactions

    In June, Ponte Gadea, linked to Zara’s owner, purchased a 421,868-square-foot FedEx facility in Vaughan for $198.3 million, or $470 per square foot. Pure Industrial developed the site in 2015 and has a lease extending to July 2031. This transaction highlights the demand for logistics centers despite a slight increase in availability.

    Reinvestment Opportunities

    Owners who sell their industrial properties are reinvesting in the market. They are focusing on acquiring larger properties or new developments. This reinvestment is crucial for meeting the ongoing demand for industrial space. It also supports the growth of the industrial real estate sector in the GTA.

    Premium Deals Reflect Market Strength

    The Summit REIT deal reflects the market’s strength and investors’ willingness to pay premiums. The 31.1% premium indicates confidence in the GTA’s industrial sector. Such deals attract more investors, further driving demand and property values. The cycle of investment and reinvestment continues to strengthen the market.

    Attractive Investment Returns

    Industrial assets offer attractive investment returns due to high demand and rising rents. Investors see potential in the industrial market despite slight increases in availability. The stability and growth prospects make these assets appealing. We expect this trend to continue as e-commerce and logistics needs expand.

    Long-Term Lease Agreements

    Properties with long-term lease agreements are desirable to investors. The FedEx facility’s lease extending to 2031 adds value to the investment. Long-term leases provide stable income streams and reduce investment risk. This stability is a key factor for industrial real estate market investors.

    Strategic Location Advantage

    The GTA’s strategic location enhances the value of industrial properties. Proximity to highways, rail networks, airports, and ports is crucial. This connectivity supports efficient logistics and distribution operations, making the GTA an attractive destination for industrial investments.

    Continuous Market Growth

    The industrial real estate market in the GTA continues to grow. E-commerce expansion, population growth, and evolving supply chain needs drive demand, ensuring the market remains vibrant and attractive to investors. Ongoing development and investment activities support this growth.

    Future Investment Potential

    The future of industrial property investment in the GTA looks promising. Strong demand, strategic location, and robust market fundamentals contribute to this outlook. Investors can expect continued opportunities for high returns. The industrial real estate sector is well-positioned for sustained growth.

    Closing Thoughts

    The GTA’s industrial market shows strong demand and investment opportunities. Geographic constraints and high-value deals drive this trend. Investors benefit from premium returns and strategic locations. Contact Lumicre for your investment needs in this thriving market.

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