Measuring Expectations: Assessing the Future of Canada s Industrial Market

Transcription

1 Canada Industrial, Measuring Expectations: Assessing the Future of Canada s Industrial Market Availability Rate 5.8% New Supply 3,091,665 sq. ft. Average Net Rent $6.24 per sq. ft. Net Absorption (3,352,425) sq. ft. Figure 1: Importance of Transportation & Warehousing Continues to Increase for the Industrial Market *Arrows indicate change from previous quarter. There was negative 3.4 million sq. ft. of net absorption in, primarily a result of 3.1 million sq. ft. of distribution space in the Greater Toronto Area (GTA) and Calgary becoming available after Target s decision to exit Canada. The national availability rate increased 40 basis points (bps) to 5.8% in. For the first time, the availability rate in Western Canada, 5.8%, is higher than the rate in Eastern Canada, 5.7%. Net rental rates increased $0.15 per sq. ft. quarterover-quarter to $6.24 per sq. ft. Construction of industrial space remains at a record high level with 19.5 million sq. ft. under construction. 55.6% of the space expected to be delivered in 2015 will be completed in Q The RBC Purchasing Managers Index reported its weakest average reading of 49.5 in. Over the last ten years, transportation and warehousing employment has taken an increasing share of total industrial space-using employment, rising to 35.2% in from 25.6% in Q The S&P/TSX Capped REIT Index posted a total return of 8.0% in. After 3.4 million sq. ft. of positive net absorption last quarter, Canada s industrial market posted negative 3.4 million sq. ft. of net absorption in Q The Canadian economy continues to be sluggish and recent data indicates that the manufacturing sector has been relatively weak. It remains to be seen what impact the low Canadian dollar will have on the manufacturing sector; however, a historical analysis can provide some insight. The majority of the negative net absorption in is the product of Target s exit from Canada 3.1 million sq. ft. of industrial space became available after the retailer s decision to leave. A 1.4 million sq. ft. distribution centre in the Greater Toronto Area (GTA) returned to the market, as well as two other distribution centres accounting for a total of 1.7 million sq. ft. in Calgary. Even after isolating Target s exit as the main cause of the large negative net absorption experienced in, demand for industrial space in Canada remained relatively soft in comparison to recent quarters. Q4 2009, with 460,000 sq. ft. in negative net absorption, was the last time the national figure dropped into negative territory. CBRE Research 2015 CBRE Limited 1

2 Vancouver Calgary Edmonton Winnipeg London Waterloo Toronto Ottawa Montreal Halifax National sq. ft. (millions) Availability Rate (%) Figure 2: Supply & Demand 4 16% (1) (2) (3) 12% 8% 4% 0% -4% -8% -12% (4) -16% New Supply Net Absorption Availability Rate (%) In addition to the GTA and Calgary, negative net absorption occurred in five other markets: Edmonton, Winnipeg, the Waterloo Region, Ottawa, and Halifax. On the other hand, Vancouver had 1.3 million sq. ft. of positive net absorption in, which is more than twice as large as the 5-year quarterly average of 621,173 sq. ft. The national availability rate increased 40 basis points (bps) to 5.8% in the largest quarterly jump in the availability rate since Q Seven out of the ten markets tracked had availability rates increase in. For the first time, the availability rate in Western Canada, at 5.8%, is higher than the availability rate in Eastern Canada, at 5.7%. Calgary had the largest increase in availability, rising 160 bps to 6.3%. Construction of industrial projects in Canada remains at a record high level with 19.5 million sq. ft. under construction in, only 50,958 sq. ft. lower than the under construction figure reported in Q Over 18.2 million sq. ft. is set to be delivered across the country in 2015, with 55.6% of this space to be completed in Q Figure 3: Market Statistics Summary Market Inventory Availability Rate (%) Vacancy Rate (%) Net Absorption New Supply Under Construction Avg. Net Asking Rent ($ per sq. ft.) VANCOUVER 180,863, ,338, ,089 2,145, CALGARY 125,368, (2,102,622) 0 5,218, EDMONTON 109,153, (269,045) 728,375 3,854, WINNIPEG 77,197, (503,255) 0 141, WEST 492,583, (1,536,067) 1,289,464 11,359, LONDON 38,800, ,501 52, , WATERLOO REGION 112,182, (205,047) 395, , GTA 753,344, (2,107,404) 1,073,208 5,300, OTTAWA 29,646, (83,901) 0 246, MONTREAL 296,571, , ,000 1,819, HALIFAX 11,659, (156,327) 0 52, EAST 1,242,205, (1,816,358) 1,802,201 8,093, NATIONAL 1,734,789, (3,352,425) 3,091,665 19,452, CBRE Research 2015 CBRE Limited 2

3 Mar 2012 May 2012 Jul 2012 Sep 2012 Nov 2012 Jan 2013 Mar 2013 May 2013 Jul 2013 Sep 2013 Nov 2013 Jan 2014 Mar 2014 May 2014 Jul 2014 Sep 2014 Nov 2014 Jan 2015 Mar 2015 Figure 4: Purchasing Managers Index Source: Royal Bank of Canada,. RBC Purchasing Managers' Index 3-Year Monthly Average *RBC PMI reading of 50.0 indicates no change, greater than 50.0 indicates expansion, and less than 50.0 indicates contraction. The RBC Purchasing Managers Index (RBC PMI), a leading indicator of the manufacturing sector s health, had an average reading of 49.5 in the weakest level since the index began in This is the first time that two consecutive months came in at contractionary levels below 50.0 (48.9 in March and 48.7 in February). This signals a further deterioration in Canada s manufacturing sector. The recent downturn in manufacturing is mainly attributable to Alberta and British Columbia, as a result of reduced investment in the energy sector. Manufacturing employment in Alberta and British Columbia dropped sharply, contrasting with job creation in the rest of Canada. The regional RBC PMI level in Ontario came in at 53.3 in March, whereas Quebec posted a level of Figure 5: CAD/USD Exchange Rate Index & Manufacturing Employment Index CAD/USD Exchange Rate (Indexed to Jan 1990) Manufacturing Employment (Indexed to Jan 1990) Source: CBRE Research, ; Bank of Canada, ; Statistics Canada,. At this time, it is too early to confidently predict the magnitude of the impact that the lower dollar and improving U.S. economy will have on Canada s ailing manufacturing sector. Historically, the CAD/USD exchange rate has a strong negative correlation with manufacturing employment when the exchange rate falls, employment in manufacturing rises. The time lag between a change in the exchange rate and a significant change in manufacturing employment ranges between 24 to 30 months. Therefore, it is improbable that any significant benefits will occur until late 2016, if any at all. Even though historical data appears to suggest that the Canadian manufacturing sector is poised for a bounce back, the sector has faced powerful structural and competitiveness headwinds in the last decade. Although a lower dollar may help to improve the manufacturing sector over the next few years, the sector will most likely fall short of its pre-recession highs. The historical relationship between the value of the dollar and the performance of Canadian manufacturing is anticipated not to be as strong as it once was in the past, due to a vastly different manufacturing landscape. CBRE Research 2015 CBRE Limited 3

4 Jan 2014 Mar 2014 May 2014 Jul 2014 Sep 2014 Nov 2014 Jan 2015 Mar 2015 Industrial REIT Prices Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Employment (millions) T&W as % of Industrial Space-Using Employment The steady decline of Canada s automotive manufacturing industry, for example, continues to be a drag on overall manufacturing. According to the University of Windsor s Office of Automotive and Vehicle Research, Canada has only received $180.0 million in new capacity investment from 2011 to 2014, compared to $7.7 billion in the U.S. and $9.3 billion in Mexico. In 2000, Canada was the 4 th largest automotive assembly country in the world; it now ranks 10th. Although a lower dollar may initially benefit the industry, a higher cost climate in Canada will ultimately negate any lasting positive effects from the exchange rate. The uncertainty surrounding the future of manufacturing in Canada is undoubtedly a concern for Canada s industrial real estate market. However, the continued rise in demand for industrial space for transportation and warehousing uses will help to counteract the effects of a stagnant or declining manufacturing sector. Over the last ten years, transportation and warehousing employment has taken an increasing share of total industrial space-using employment, rising to 35.2% in from 25.6% in Q The increase in large bay construction projects, those over 100,000 sq. ft., is being driven by strong demand for modern distribution and warehousing space. Over the past four quarters, seven out of the top ten lease transactions in Canada, measured by square footage, were for distribution and warehousing facilities. As e-commerce continues its rise, an increasing share of the demand for industrial real estate in Canada will be fuelled by the transportation and warehousing sector. Figure 6: Industrial Space-Using Employment % 35% 30% 25% 20% 15% 10% 5% 0% Manufacturing Employment Transportation & Warehousing (T&W) Employment T&W as % of Industrial Space-Using Employment Source: CBRE Research, & Statistics Canada,. Figure 7: Industrial REIT Prices Dream - DIR.un (TSX) Summit - SMU.un (TSX) Pure - AAR.un (TSX) $14 $12 $10 $8 $6 $4 $2 $0 The S&P/TSX Capped REIT Index posted a solid Q total return of 8.0%, consisting of 6.5% in price appreciation and 1.5% in yield. In, Dream Industrial REIT (Dream) provided a total return of 9.1%, which is significantly higher than its total return of 3.1% in Dream closed Q with a unit price at $9.01, 59 bps higher than its closing price in Q Summit Industrial Income REIT (Summit) ended with a total return of 6.7%, which is down from its total return of 9.6% in Summit closed with a unit price of $6.04, 26 bps higher than its closing price in Q Pure Industrial REIT (PIRET) experienced a total return of 15.5%, which is a major improvement from its total loss of 0.4% in Its closing price was $5.05 in, 61 bps higher than its close in Q Source: Thomson Reuters, 2015 & Royal Bank of Canada, CBRE Research 2015 CBRE Limited 4

5 Figure 8: Notable Sale Transactions Size Sale Price ($) Purchaser Purchaser Type Address Price ($ per sq. ft.) 921,000 70,173,682 Choice Properties REIT REIT 1400 Church Street, Pickering, ON ,207 37,500,000 HOOPP Institutional 35 Bosworth Crescent, Brantford, ON ,644 18,858,250 Summit II REIT REIT 3720 Avenue Des Grandes Tourelles, Boisbriand, QC ,610 19,000,000 Panattoni Development Private Investor 2400 & 2430 Royal Windsor Drive, Mississauga, ON ,755 17,500,000 Private Investor Private Investor River Road, Richmond, BC 79 Figure 9: Notable Lease Transactions Size Tenant Tenant Industry Address 500,814 Dare Foods Limited Food & Beverage Manufacturing/Processing 25 Cherry Blossom Road, Cambridge, ON 407,156 Ryder Integrated Logistics Logistics 5900 Avebury Road, Mississauga, ON 341,905 Accent-Fairchild Group Wholesale 5151 Thimens Blvd., Saint-Laurent, QC 277,996 Emblem Logistics Logistics 7825 Winston Churchill Blvd., Brampton, ON 253,000 Medline Canada Corporation Medical Equipment 8690 Escarpment Way, Milton, ON Figure 10: Notable New Supply Size Property Name/Address Developer Speculative or Design-Build 245,000 Queensborough Logistics Centre 501 Boyd St., New Westminster, BC Oxford Properties Speculative 211,000 Sunwapta B Avenue, Edmonton, AB WAM Speculative 209, Heritage Road, Brampton, ON Orlando Speculative 168, B Southgate Drive, Guelph, ON Cooper Construction Speculative 98,553 Tilbury West Business Park (Phase 2) nd Street, Delta, BC Beedie Development Group Speculative CONTACTS Andrew E. Wright* EVP, Industrial Practice Leader, Managing Director andrew.wright@cbre.com Ross J. Moore Director of Research ross.moore@cbre.com To learn more about CBRE Global Research, or to access additional research reports, please visit the Global Research Gateway at Roelof van Dijk Research Manager roelof.vandijk@cbre.com *Broker Tyler Yen Research Analyst tyler.yen@cbre.com OFFICE: Toronto Downtown 145 King St. West, Suite 600 Toronto, ON M5H 1J8 Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE Limited clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE Limited.