Marcus & Millichap

Toronto Industrial Investment Forecast

Toronto Metro Area, 2018 Outlook

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Strengthening Economy, Structural Shifts in Retail Spur Expansion of Toronto Industrial Sector

Rising tenant demand for last-mile fulfillment space. Robust population growth and strong consumer spending are driving an expansion of Toronto’s industrial sector, fueling a stout period of construction. The rapid growth of e-commerce has enticed distribution and logistics providers to grow their footprint, along with the addition of online retailers such as Wayfair to the market that are seeking last-mile locations in proximity to their customers. Traditional industrial space users are underpinning healthy industrial property metrics resulting from increases to manufacturing sales and rising residential construction. Development in 2017 was greatest in the areas of Brampton and Mississauga as land prices have become prohibitive to new development closer to Toronto proper. Supply growth will be led by Vaughan this year with the industrial corridors to the west of the Toronto following close behind. Vacancy will remain historically low in the Vaughan and Mississauga areas this year even as new inventory comes online, supporting the largest rental rate increases of the cycle.

Narrowing cap rate spread boosts search for higher yield. Substantial demand from owner-occupiers has been in place in the GTA and will hold strong this year. Demand remains elevated for light industrial buildings between 10,000 and 30,000 square feet in the Vaughan and Mississauga areas, and new space coming online here will witness intensified investor competition. First-year cap rates have compressed to record lows, reaching down to 4 percent in Vaughan and as low as 5 percent in Mississauga, narrowing yield spreads as long-term interest rates have begun to rise. Overall, industrial investment sales recorded the greatest deal flow of the cycle last year as property metrics and demand drivers attracted a broad base of investors to the market. Buyers will search for higher yields this year, looking to areas such as Scarborough and Etobicoke where cap rates are often in the upper-5 percent to low-6 percent range.

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