Even though the Greater Toronto Area has seen more industrial portfolio transactions than the first half of 2013 and a similar amount of single assets transact, the market has experienced a considerable decline in sales volumes. The $627 million of transactions is down 19 per cent from the second half of 2013 and 43 per cent from the H1 2013, according to JLL research.
The change is due in large part to smaller deal sizes being brought to the market in the first six months of the year – with average portfolio valuations down 53 percent to $43 million from $81 million.
“Although 2014 has been lagging so far, we are optimistic about the remainder of the year,” said Fraser Plant, senior vice president of Industrial and Logistics in JLL’s Mississauga office. “For the right assets, there will be healthy competition. The investor community continues to grow with new participants from both the public and private sectors. More importantly, fundamentals, specifically the cost of capital, remain very attractive for those looking to acquire.
JLL’s GTA Industrial Investment Report predicts a healthy outlook for the Toronto industrial leasing market with stable rent growth, historically low availability rate and a disciplined approach to bringing new product to the market.
In the first half of the year, the average cap rate of industrial investment sales climbed to 6.8 per cent, up 50bps from the record-setting low of 6.3 per cent in 2013. According to the report, this year-over-year increase in cap rate can be attributed to the limited offerings of Class-A assets so far in 2014.
“Class A buildings are very highly coveted and assets greater than 100,000 square feet being offered remain scarce,” said Plant. “Investors recognize the difficulty in replacing long term stable income, however, Vendors will find certain assets within their portfolios for disposition to take advantage of the strong buy side fundamentals.”
Investment activity thus far was comprised of primarily Class B to Class A- assets. Therefore, the increasing average yield is not an indication of declining valuation or softening demand, but rather the type of assets being traded.