CoStar, the world leader in commercial real estate information and analytics, has the most comprehensive database of real estate data throughout the US, Canada, the UK and Europe. LIDD Real Estate utilizes CoStar platform’s vast research capabilities on a daily basis to better serve our clients. This month, one of CoStar researchers, Aman Chowdhary, published a report about the Greater Toronto Area (GTA) industrial real estate market and the current supply-demand imbalance. This article is published below:
Toronto Industrial Rents Hit Highest Level Ever
By: Aman Chowdhary
Supply-Demand Imbalance Fueling Spec Development, Hitting Smaller Tenants Hardest
The supply of industrial space in the Greater Toronto Area reached a historic low while industrial rents reached their highest level ever in the second quarter of 2019, due in no small part to the ongoing e-commerce boom.
The imbalance between supply and demand is fueling speculative industrial developments and forcing tenants to make lower-quality space.
The Greater Toronto Area’s industrial vacancy rate was 1.2% in the second quarter of the year, down 46 points year over year. The dwindling available space heavily favours landlords, and with increased construction costs, land prices and more expensive materials and labour, developers have little choice but to increase rents for new construction and premium existing buildings.
Looking at the movement of rents by building size, this pressure has hit smaller tenants the hardest, with a 57.1% increase in the small bay market, below 20,000 square feet, while the large bay market, 200,000-plus square feet, has gone up 34.6%. For smaller occupiers, this means sourcing from off-market opportunity or having to grossly outbid competitors to secure the right space. For users looking for bigger spaces, this may mean preleasing a couple of years in advance or developing custom built-to-use space.
Industrial sale prices have also climbed steadily. The average sale price for industrial space in the second quarter of 2019 was $167 per square foot, representing a 2.1% increase year over year. With capitalization rates compressing, landlord profit margins are lessening and putting further pressure on tenants with higher rental rates.
The exponential growth in the GTA industrial market has and continues to be driven by the relentless expansion of e-commerce. Mainstream products such as clothing, books, supplies and other small goods are all moving towards online sales with large eretailers gaining market penetration with each vertical. With cold storage facilities being built across the GTA, the food sector is also adopting offerings like home-delivery grocery and premade meal services further driving this wave of change. Location is now the most important factor for users requiring logistics, cold-storage, warehousing or distribution facilities, as being close to highways and population centres is the most cost-effective way to grow operations.
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