Written by: Adam Pitura CPA, CA
With new ESG (“Environmental Social Governance”) regulations coming in the immediate future, whether you have a current lease or your lease is expiring, this will be at the forefront of your decision-making going forward.
The more pressing matter to many is the interest rate hikes from the Bank of Canada, soaring from 2.45% in January 2022 to 6.95% in July 2023. With the market tightening, many companies with large industrial leases will carry debt facilities to finance their inventory. If you have old stock sitting on your premises, it might make more sense to scrap the inventory rather than pay for space you don’t need.
The Greater Toronto Area (GTA) as a whole has seen an increase in rental rates of 4% from Q4 2022 to Q1 2023; the year-over-year increase was 31%. Based on the momentum ratio, defined as the Buy %/Sell %, the industrial real estate asset class dominates the top five with single-tenant industrial, industrial land, and multi-tenant industrial. As expected, traditional “office space” has seen negative momentum, with the sale percentage outpacing the buy percentage.
For industries that require in-person labour, there is no work-from-home option. The industry that has begun to take centre stage is the third-party logistics industry. The health and success of the industry are key to Ontario’s economy. For everyday consumer goods, the ability to have next-day, or sometimes, same-day delivery is core to many companies’ operations. Securing a strong relationship with a reputable logistics company is vital.
Two of the four GTA zones caught our attention – Central and East.
GTA Central – Scarborough, a hidden gem?
- Inventory – 259M SF
- Availability – 4.3M SF
- PSF cost – $18.60
GTA Central is an expanding market. Scarborough presents an opportunity for those looking to acquire space that is part of the GTA Central that is newly constructed. In construction currently, there is approximately 300,000 sf.
Scarborough’s average asking net rental rate is $16.27,10.4% lower than the average $sf cost for GTA Central. Scarborough has location priority to Toronto and proximity to GTA East and markets outside the GTA.
Comparatively, Etobicoke has ~1M of industrial space under construction, which will be at or above the current average psf of
$19.32 —making that a premium of an additional $3.05 psf (18.7%higher) for a proximity premium to Pearson and the US/CA border. For industries reliant on 3PL and international trade, this premium is likely to be a deciding factor.
Additionally, Scarborough is much more affordable for employees to live in, with an average home price of $650,000 compared to Etobicoke at $1,701,000.
GTA East – Durham discount?
- Inventory – 57M
- SF Availability – 366K SF
- PSF cost – $15.60
The GTA East sector is home to the cheapest psf costs of any GTA market, caused by the build-up of traditional industrial spaces in the western parts of Ontario (focused on cross-border trade) and the priority placed on proximity to Toronto.
The (not so) secret factor that makes the GTA East so compelling is not the cheap cost but the area’s future development. Specifically, the Seaton community currently under construction is projected to provide housing for 70,000 residents and will be located near hwy 407 and hwy 401.
Kubota Canada (a multinational agricultural corporation) has already moved their Canadian headquarters to the Seaton community, and many other large organizations are also considering the move.
Only two of the 29 municipalities assigned housing targets by the Provincial government are currently on pace to meet or exceed those targets (Bradford and Pickering). Pickering is currently on pace to meet the targeted housing starts with 7% excess over the target set.
Additionally, while the potential of the Pickering Airport is more speculative in nature as of August 2023, the airport is on life support after the Pickering City Council reneged on support for the project.