What is your assessment of the current industrial market cycle in the Greater Toronto Area (GTA)?
It’s no surprise that rising interest rates have had a significant and direct impact on commercial real estate. Even the otherwise resilient GTA industrial market has felt the pressure of the economic uncertainty caused by inflation and interest rates.
The market consensus is that interest rates have stabilized, which should mean the bottom of the current market cycle. On the other hand, rental rate projections, which are the other primary driver of industrial valuations, are slowing down. This past quarter, we saw a shift from annual growth rates of +/- 20% to those aligned with inflation. The slowing in rental rate growth is working its way through valuations. This may put the GTA industrial market closer to the middle of the market cycle.
Regardless of the cycle, industrial investment has historically been undersupplied, with more buyers than sellers, and this remains the case today. Real estate investors are generally bullish long-term on the GTA’s industrial investment market and want to add to their portfolio.
What have been the main challenges to completing transactions and how can these be overcome?
Two common challenges are shifting market conditions, particularly interest rates, and concerns that arise in due diligence. The best way to manage both potential challenges is to overcome hesitation with a thoughtful and expert approach to the transaction, accelerating its timeline. This can be done by completing proper pre-marketing due diligence. Before going to market, expert advisors with sector-specific knowledge can quickly address these challenges by reviewing leases, environmental and building condition reports, and operating statements before soliciting buyers. This pre-marketing due diligence allows for quicker transactions, reduces the risk of withdrawal or price reductions, and minimizes exposure to potential shifts in market conditions.
What is the investor profile in the GTA’s industrial market? And who is divesting?
Last year, we saw institutional investors divest some of their industrial properties as the rapid change in interest rates caused allocation and redemption issues and prompted sales. As a result of more expensive financing, particularly construction financing, institutional investors sold existing buildings to re-capitalize and fund new developments in their pipelines.
With institutional investors less active, private investors became more significant players on the buy side. In the last five years, private investors’ representation has grown from roughly 10% of the GTA industrial market to over 30%, remaining relatively consistent amidst the challenging market conditions of the past 24 months.
Over the past year, foreign institutional investors have also entered the GTA industrial market. GIC Private Limited, a Singaporean sovereign wealth fund; Brookfield Properties; and TPG Inc., an American private equity firm, have all recently invested in GTA’s industrial sector.
In the current interest rate environment, value-added real estate investments are taking the spotlight, with investors seeking higher risk-adjusted returns. However, if interest rates were to drop, it would likely prompt an increase in institutional capital to refocus on core Class A opportunities at returns aligned to previous years. Domestic institutional investors are well-capitalized, and I expect an increase in their acquisition activity in the short term.
Is it easier now to underwrite an investment with the recent stability in interest rates?
Absolutely! However, “stability” is relative as bond rates continue to fluctuate, albeit significantly less than in 2022 and 2023. In the past, we saw market rental rates achieve an upward trajectory of 20% year-over-year growth. If market rental rates continue to stabilize, another key variable in underwriting real estate investments will also be simplified.
What key trends do you foresee in the GTA’s industrial investment market for the balance of the year?
GTA industrial availability rates have been increasing rapidly, from a low of 0.6% in Q2 2022 to 3.1% currently. The rise in availability has released much of the upward pressure on market rental rates, and we have seen rental growth come off from +/- 20% down to +/- 3%. The market remains extremely tight at 3.1% availability, and we expect market rents to remain stable in the GTA.
We should expect the year’s balance to reflect 2023 but with potentially less transaction volume in the industrial investment market. Those looking to divest did so in 2023 and have primarily re-allocated that capital, resulting in less sales activity in 2024.
Why should investors work with you for their commercial real estate needs?
Working with an experienced advisor is critical to navigating challenging market conditions. With over 20 years of experience in investment sales, I provide expertise and best practices across various transaction types and markets. Our team prioritizes client goals, pre-marketing due diligence, and eliminating risk for an efficient and effective transaction. Additionally, Colliers offers a suite of tools and services, including Debt Advisory, for those looking for a full-service approach to their real estate needs.