Did anyone have a strong Toronto industrial real estate market on their 2023 Bingo card?
Indeed, the industrial real estate sector in North America’s fourth-largest city has been an impressive development, defined by its robust growth and performance. Despite rising interest rates, the industrial sphere has been driven by expanding economic conditions, favourable market conditions, and growing demand. Suffice it to say Toronto has positioned itself as a strong and resilient hub for industrial real estate investments, be it large or small.
It can be easy to dismiss the strength of the Toronto industrial real estate industry. But take a gander at some of these statistics:
- Vacancy rates remain below one per cent.
- Availability rates were just two per cent in the first quarter of 2023.
- Large transactions persist in the Greater Toronto Area. To put it into perspective, a company recently purchased a large tract of land worth $70 million.
- Shortages exist in immense industrial units (5,000 to 20,000 square feet) for both lease and sale.
- Demand has outpaced supply.
Looking ahead, industry experts believe that the pandemic-era shift from manufacturing to warehousing and distribution will continue to be the primary usage of industrial space.
But why is the GTA enjoying this exceptional growth while other Canadian commercial real estate market locations are not emulating the nation’s largest city?
Toronto Industrial Real Estate: A Primer
Toronto possesses many vital qualities: a strong economy, diverse industries, and strategic locations. The real estate market – residential and commercial – is well-regulated, while the political climate is stable. This explains why there has been such an increase in investment from domestic and international investors.
This is indeed the norm and explains why developers are actively constructing new industrial properties and repurposing existing buildings to meet demand and continue to attract investors.
As previously mentioned, there has been an increase in demand for distribution and warehousing space. During the meteoric ascent of e-commerce and the growth of online retail, companies have been searching for facilities to keep up with their logistics and warehousing activities. To meet their customers’ demands consistently, businesses desire efficient and convenient industrial spaces to support operations and cater to consumers’ constantly changing preferences. This is where Toronto thrives: close proximity to a consumer base, tremendous transportation network, and excellent fundamentals.
The most surprising development in the Toronto industrial real estate market has been in retail. Well, somewhat.
After beleaguered retail giant Bed Bath and Beyond announced that it would liquidate and shut down its stores, Canadian Tire immediately scooped up these locations and acquired nearly 250,000 square feet in three provinces: British Columbia, Alberta, and Ontario. Winners also picked up two leases.
A similar trend occurred at shopping centres in the GTA, such as the Hillcrest Mall, the Markham Town Centre, and the Pickering Town Centre. When Nordstrum departed from the Canadian marketplace, many experts were concerned that this would leave a significant dent in Canada’s retail sector.
Not quite, as a chorus of department stores, especially Hudson’s Bay Company stepped in and filled these vacated retail spaces.
Office Real Estate in Toronto
Of course, concerns still surround the state of the office asset class in 2023 and heading into 2024.
A new report from commercial real estate intelligence provider Altus Group highlighted that office investment transactions declined by $1.4 billion to $500 million in the first quarter of 2023. The report noted, however, that there was a scarcity of so-called blockbuster office traders, although there was a $100 million acquisition of the former General Motors office in Oshawa, which is situated just outside of Toronto.
“Uncertainty around the office asset class persisted, but with multiple significant office transactions this year, investors continue to show optimism for this asset class as people slowly start heading back into the office,” the report stated.
“The pause in market activity in the latter half of 2022 continued into 2023, with a bid-ask price gap between sellers and buyers. The closing of some transactions saw challenges where the investors frequently had to renegotiate with lenders – both when the deal was initiated and then at the closing date. To help get the deal over the finish line, purchasers had to bridge the gap with higher interest rates.”
Optimism or Fear in Toronto Commercial Real Estate?
That said, looking ahead, some reports suggest that the outcome of the 2023 mayoral election might turn out to be a boon for commercial real estate in Toronto. There could be more certainty, direction, and opportunity in this corner of the market, especially if commercial real estate can also help address critical housing issues by inking public-private partnerships to increase supply in both real estate realms.