Greater Toronto Area Industrial Real Estate Report 2011 Q3

toronto ontario

COLLIERS INTERNATIONAL | MARKET REPORT

www.colliers.com/toronto

Canadian Market Overview The Canadian economy is once again outperforming many of its peers. While this is an enviable position, the question remains: will Canada be able to navigate the global economic headwinds and sidestep either a noticeable slowdown or recession?

Commercial real estate has weathered the recent storm and is well positioned for any softening of the economy. Office markets have largely digested the new inventory that was delivered in the past 24 months and are moving towards healthy levels of occupancy. One area that appears somewhat exposed should the global economy enter a protracted downturn is the industrial property class, which in many markets is tied closely to import and export activity. There are mixed signals on both import and export activity levels. Exports have recently reported gains, however the slowing U.S. economy points to a pullback from our largest customer. The most recent jobs report from the U.S. has further demonstrated the fragility of their economy and will likely hurt U.S. consumer confidence, and hence retail activity. Imports are also in positive territory in the most recent releases, but some caution is warranted as the Canadian Consumer Confidence Index has retreated slightly in July, which may point to a future softening of retail sales and, of greater concern, housing activity. Retail activity is a driver of warehouse and distribution facility demand in many markets, pointing to a reduction in demand for that property type if retail spending is reduced. On a positive note, Canadian businesses appear bullish on future prospects and have started to make capital investments in machinery and equipment, boosting imports in those areas. The outlook appears to call for slow and steady performance in the near term, with a return to moderate growth as external economic variables are stabilized.

Fall 2011 | INDUSTRIAL

GTA East

GTA West

GTA North

GTA Central

MARKET INDICATORS

2011 Q2 2011 Q3

INVENTORY AVAILABILITY RATE SUBLEASE RATE TOTAL AVAILABLE SF NET ABSORPTION UNDER CONSTRUCTION NEW SUPPLY AVERAGE ASKING NET RENT AVERAGE SALES PRICE

FORECAST

Net Absorption Average Asking Net Rent Availability Rate

Source: Colliers International, September 2011

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Net A

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(40)

(20)

(60)

0 0

6.9

4.6

2.3

2001

3 4

(2.3)

(4.6)

(6.9)

40

60

20

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2012

1 2 3

GTA Industrial Market Historical Performance & Forecast

Q3 2001 - Q3 2012f

Absorption Availability Rate Average Asking Net Rent

The industrial real estate market has proven to be resilient despite the economic downturn and continued uncertainty in the economy. Since Q2 2011, availability has declined to 4.9 per cent, the lowest level since Q3 2008 with most of the decline observed in the GTA North and GTA West markets. In addition, the sublease ratio is at 11 percent, the lowest in a decade. Notwithstanding, demand for industrial space has slowed since the beginning of 2011 when comparing quarterly numbers.

While vacancy rates at this level are typically accompanied by new development, minimal new supply has been delivered across the Greater Toronto Area (GTA), with less than 400,000 square feet in the GTA North and GTA West combined and only a few new construction projects underway. This

has resulted in a shortage of large blocks of space, particularly those with ceiling heights exceeding 24 feet.

Average asking net rent is reported at $4.50 per square foot, which continues to remain below levels witnessed prior to the downturn in. It should be noted that the lack of new supply, which is associated with higher asking rents, coupled with the addition of available space in older buildings with lower asking rates has influenced this average downwards and net rents for preferred space in quality locations are often significantly higher.

The existing landscape of lower average rents combined with a lack of new supply are a function of economic uncertainty and landlord confidence, as landlords appear to

be more focused on securing tenancies today rather than achieving rental rates that the market would normally dictate.

Looking ahead, the Conference Board of Canada in its September 2011 release forecasted the industrial sector in the GTA to further expand, although at a slower average pace of 0.8 percent over the next four quarters with most of the growth anticipated to occur in the manufacturing sector.

With this in mind, Colliers expects demand for industrial space to slow but continue to put downward pressure on availability with a corresponding increase in rents, and push market fundamentals into more favorable territory for new development.

GTA | HISTORICAL PERFORMANCE & FORECAST | Q3 2001 - Q3 2012F

Greater Toronto Area Overview

P. 2 | COLLIERS INTERNATIONAL

MARKET REPORT | FALL 2011 | INDUSTRIAL | TORONTO

THE MARKET With the second largest industrial inventory in the GTA, the GTA Central market, encompassing Etobicoke, North York, Old City of Toronto, York, East York and Scarborough, continuously quotes the lowest rental rates compared to other markets. This can be attributed to the fact that more than half of this market’s inventory is comprised of buildings of less than 100,000 square feet with a clear height of less than 24 feet. Spaces with these characteristics are generally in less demand and command lower rents.

TRENDSAsking rental rates have remained stable at $3.80 per square foot, while the availability rate in the GTA Central market has declined modestly since Q2 2011 from 3.8 percent

to 3.5 percent. An availability rate this low has not been reported in this market since midyear 2008, which suggests sustained employment with modest growth in these industrial markets.

In total, approximately 850,000 square feet have been absorbed since spring 2011. The absorption of industrial space was especially strong in Q2 2011 followed by a marginal decline in the third quarter. It remains to be seen whether this is a temporary slowdown or the beginning of an upward trend.

While the Scarborough and North York submarkets quoted relatively large amounts of available space, 2.2 million and 1.5 million square feet respectively, approximately 60 percent of the overall available space

GTA Central

FORECAST



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(20)

(10)

(30)

0 0

6.0

4.0

2.0

2001

3 4

(2.0)

(4.0)

(6.0)

20

30

10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2012

1 2 3

GTA Central Industrial Market Historical Performance & Forecast

Q3 2001 - Q3 2012f


GTA CENTRAL | HISTORICAL PERFORMANCE & FORECAST | Q3 2001 - Q3 2012F

in GTA Central is located in the Etobicoke submarket. Of this space, almost 70 percent is made up of buildings of less than 24 feet in ceiling height and in smaller sized units.

FORECASTAccording to the Conference Board of Canada, industrial space utilizing sectors such as transportation and warehousing, as well as wholesale and retail trade, are expected to grow moderately in the GTA over the next 12 to 24 months. With a lack of major new supply on the horizon, Colliers projects that the supply of available space will slowly decrease to 3.3 percent of the inventory by Q3 2012, while rents will remain close to current levels.

COLLIERS INTERNATIONAL | P. 3


GTA NorthTHE MARKET The GTA North market, encompassing Vaughan, Richmond Hill, Markham, Aurora and Newmarket quotes the highest rental rates in the GTA and is led by the Markham submarket with the highest weighted average asking net rent of $6.40 per square foot. On a percentage basis, more buildings in the GTA North market contain ceiling heights in excess of 24 feet when compared with other GTA industrial markets, which contributes to higher average asking net rents.

TRENDSSince Q2 2011, available space has further decreased from 5.2 percent to 4.7 percent or approximately six million square feet. Almost one million square feet of industrial

space has been absorbed over the same period of time, primarily in Richmond Hill and Markham. Occupancy levels this high have not been reported since early 2007, signifying continued demand for this market. Rental rates have increased by $0.20 per square foot to $5.15 per square foot by Q3 2011. With the exception of Newmarket, all other submarkets quoted higher rents than in Q2 of this year.

FORECASTColliers anticipates a slower rate of decline for available industrial supply but expects that quoted average rents will be sustained above the $5.00 per square foot mark.

FORECAST



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(5)

(15)

0 0

8.0

6.0

4.0

2.0

2001

3 4

(2.0)

(4.0)

(6.0)

15

20

5

10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2012

1 2 3

GTA North Industrial Market Historical Performance & Forecast

Q3 2001 - Q3 2012f


GTA NORTH | HISTORICAL PERFORMANCE & FORECAST | Q3 2001 - Q3 2012F



THE MARKET GTA East is the smallest market among the GTA industrial markets and is comprised of Ajax, Oshawa, Pickering and Whitby. Most of the available space remains located in Whitby and Pickering, in a number of smaller and mid-sized buildings where availability rates exceed 12 and 7 percent respectively.

TRENDSAfter more than two years with an elevated availability rate of 7.5 percent on average, the overall availability rate has decreased to 5.9 percent in the GTA East market, amounting to less than two million square feet of available space by the end of the third quarter. This decline was most pronounced in Ajax, but demand for industrial space

has been otherwise equally distributed among the GTA East submarkets. Overall, almost 600,000 square feet of industrial space has already been absorbed in the last six months, doubling the 10 year average annual demand for this market. Rental rates decreased to $4.30 per square foot as lower-demand, less expensive space remained on the market, influencing the rent average downwards.

FORECASTColliers expects further declines in availability, although only modest increases for rent levels over the next 12 months given sustained levels of uncertainly in the economy.

GTA East

FORECAST



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(5)

(10)

0 0

12.0

8.0

4.0

2001

3 4

(4.0)

(8.0)

10

15

5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2012

1 2 3

GTA East Industrial Market Historical Performance & Forecast

Q3 2001 - Q3 2012f


GTA EAST | HISTORICAL PERFORMANCE & FORECAST | Q3 2001 - Q3 2012F


MARKET REPORT | FALL 2011 | INDUSTRIAL | TORONTOMARKET REPORT | FALL 2011 | INDUSTRIAL | TORONTO

GTA WestTHE MARKET GTA West is the largest industrial market in the GTA, with over 40 percent of the GTA’s total industrial inventory found within its boundaries. Over 16 percent of the inventory is comprised of buildings greater than 100,000 square feet with a clear height greater than 24 feet, in response to the need for large warehouse and distribution facilities from many wholesale and retail companies.

TRENDSGTA West has experienced the most leasing activity in the GTA industrial market since Spring 2011 and, as a result, availability has decreased from 6.6 percent to 6.1 percent in the same time period—a level that has not been reported since prior to the recession. Strong

demand occurred in Q2 2011, predominantly in buildings over 100,000 square feet with clear heights of 24 feet and higher, leaving the majority of available space—42 percent—in buildings with clear heights of less than 24 feet. During Q3 2011, on the contrary, GTA West experienced a softening in demand as available space increased marginally by approximately 350,000 square feet. Despite the strong decline in availability in Q2 2011, rental rates decreased by 3.5 percent to $4.67 per square foot. Similarly to the GTA East market, this dynamic is primarily a function of space that is in less demand and, as it remains on the market quoting lower rental rates, it puts deflationary pressure on average asking rents. The highest average asking rents were seen in Milton at $5.06 per square foot and the lowest in Burlington at $4.36 per square foot.

FORECASTWith only minimal new supply, Colliers expects demand for industrial space in GTA West to remain positive with rents remaining at current levels, although demand may be constrained due to a lack of functional space and continued uncertainty in the economy.

FORECAST



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(30)

(10)

(40)

0

(20)

0

8.0

6.4

4.8

1.6

3.2

2001

3 4

(1.6)

(3.2)

(4.8)

(6.4)

30

40

50

20

10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2012

1 2 3

GTA West Industrial Market Historical Performance & Forecast

Q1 2001 - Q3 2012f


GTA WEST | HISTORICAL PERFORMANCE & FORECAST | Q1 2001 - Q1 2012F



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Asking Net Rent InventoryThe dollar amount requested by landlords for direct available space, not including subleases, expressed in dollars per square foot per year.

Industrial inventory consists of existing industrial buildings which are 15,000 square feet and larger.

Availability Net AbsorptionThe amount of available space divided by the building’s inventory base. Available space is space that is available for lease, and may or may not be vacant.

The net change in physically occupied space between the current measurement period, and the last measurement period. It can be either positive or negative.

Industrial Building VacancyFacilities in which the space is used primarily for research, development, service, production, storage or distribution of goods, and which may also include some office space. Industrial buildings are further divided into three primary classifications: manufacturing, warehouse and flex space.

The amount of vacant space divided by the building inventory base. Vacant space is physically unoccupied, and it may or may not be available for lease or sublease. This is physical vacancy. It is not determined whether a tenant is paying rent on the space.




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Documents

Greater Toronto Area Industrial Real Estate Report 2011 Q3