Q3 2017 Waterloo Region Industrial Market Report

Research & Forecast Report

WATERLOO REGIONINDUSTRIAL Third Quarter 2017

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2 Research & Forecast Report | Third Quarter 2017 | Waterloo Region / Industrial | Colliers International

Market Summaries

City of Cambridge ..........................................................................................................4 City of Kitchener ..................................................................................................... 5 City of Waterloo ...................................................................................................... 6

Glossary ............................................................................................................................... 7

Table of Contents


Waterloo Region Market Overview

Although the market fundamentals remain strong, there is a sense that the market has gone through a cooling off phase, especially compared to the hype that surrounded the general real estate market in the first half of 2017. In Q3, the Region saw just over 17,000 square feet of net absorption, down considerably from the 709,000 square feet in the previous quarter. The vacancy rate has increased slightly from 3.66% to 3.82%, however is still quite low, especially considering that close to 20% of the vacant space is either functionally challenged or conditionally sold. The vacancy rate will remain below 4% over the next two quarters and is expected to trend downward.

Demand for industrial space in the Region remains healthy, however, it is primarily focused on owner-occupier purchase opportunities over leasing and generally does not line up with supply. Over 90% of the available space is for lease with only 10% for sale, resulting in lower overall market activity as users sit on the sidelines waiting for the right opportunity. Much of the demand seems to be more about users wanting to own their space rather than actual growth, otherwise we would see pressure on users to abandon the desire to own and move on to lease options.

Speculative developments, with higher lease rates and the cost and delayed occupancy for office build-out, are finding it difficult to compete with second- and third-generation spaces. Just over 240,000 square feet of spec space, all in Cambridge, remain unleased while other spaces have leased since construction of those projects completed. Much of the lease activity has been in the 20,000 to 50,000 square foot range and primarily focused on renovated Class B buildings with ‘white boxed’ interiors, new lighting and updated office spaces. The trend towards newly constructed Class A industrial space has tapered; tenants remain focused on improving the quality of their space, but are taking a more budget-minded approach.

Pricing is trending up, although not to the extent that the market activity would suggest; buyers and tenants are showing some restraint in negotiations. Average asking lease rates have increased from $4.92 to $5.07 per square foot, largely due to some of the lower cost leasing options being absorbed, leaving

Market IndicatorsRelative to prior period

Waterloo RegionQ2 2017

Waterloo RegionQ3 2017 Trend

VACANCY 3.66% 3.82%

NET ABSORPTION 709,199 17,786

CONSTRUCTION 172,580 139,036

RENTAL RATE* $4.92 $5.07 * Rental rates for current quarter are asking weighted averages for all submarkets.

availability in the more expensive Class A spaces.

Cambridge continues to be the dominant market in the Region with 59% of all transacted space over the last two quarters. This activity is primarily driven by the City’s industrial-related economic development strategies as well as the proximity and accessibility to Highway 401. There are two small bay spec developments underway in Cambridge with completion anticipated for Q2 2018, adding 63,000 square feet to the overall inventory. Kitchener’s industrial market remains stable and healthy, however, very little growth is expected over the next two quarters; economic development activities have shifted to other areas, and development land in key locations remains scarce. Waterloo’s industrial market has stabilized after several years of declining inventory. It remains the primary, and in most cases, the only choice among the Waterloo faithful. With virtually no industrial land available, Waterloo will not see any growth in the near future. The City’s distance to Highway 401 is a challenge for attracting new industrial investment since most users are eager to minimize drive times to their customers and suppliers.

Over the next two quarters, demand for purchase opportunities will continue, but there will also be an increase in leasing activity and in net absorption over Q3, which will push the vacancy rate down further. Construction activity will remain very low with few new projects contemplated, resulting in a stable inventory.

Investment Market

There were several multi-tenant industrial buildings sold in the Region in Q3. It is unusual for that many trade hands in a quarter. We had predicted for some time that the downward pressure on cap rates would continue in this asset class and this thesis was proved out as these buildings sold at new record low sub-6% cap rates. The prices per square foot have also continued to rise. These properties sold between $95 and $125 per square foot. The demand for industrial properties, both from investors and users, is strong and far exceeds supply. Prices will continue to rise for the medium term, and the volume of sales will be restricted by supply only as there are many more buyers for industrial investment properties than there are sellers.

Regional Historical Performance and Forecast

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Net Absorption New Supply Vacancy Rate


Notable Lease TransactionsTENANT NAME & ADDRESS TYPE APPROXIMATE

SIZE (SF)

1. Hunter Amenities International1250 Franklin Boulevard Headlease 67,852

2. RDJ Bakeries1250 Franklin Boulevard Headlease 60,445

3. TCI Powder Coating201 Shearson Crescent Headlease 26,656

4. Green Metals Canada115 Saltsman Drive Headlease 19,040

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Notable Lease Notable Sale New Supply

City of CambridgeCambridge remains the most active of the Region’s industrial markets; with quick access to Highway 401, readily available serviced land and reasonable development charges, it will continue to grow and attract new investment. New speculative projects attract tenants seeking modern, efficient facilities while less functional, outdated buildings tend to find lease up more challenging. Construction activity has slowed as users seek out existing opportunities and developers sit on the sidelines, waiting for signs of improvement. Purchase options are in demand, however the availability of purchase inventory is the limiting factor.

Trends > Sale activity remains strong as low interest rates and financing availability encourage users to purchase.

> Lease activity has seen a resurgence, fuelled by larger tenants leasing up Class B spaces.

> Lack of supply is resulting in upward pressure on both lease rates and per square foot sale prices.

Summary Statistics Cambridge Industrial Market 2017 Q2 2017 Q3 Trend

Industrial Inventory 31,854,357 31,959,668

Net Absorption 535,517 43,602

Vacancy Rate 4.17% 4.35%

Average Asking Net Rent(Per Square Foot) $4.60 $4.86

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Notable Sale TransactionsPURCHASER & ADDRESS PRICE APPROXIMATE

SIZE (SF)

5. 4 Fathers Brewery125 Guelph Avenue $2,100,000 77,700

6. Skyline (Investment)55 Fleming Drive $7,150,000 75,248

7. H Wolynetz Investments Ltd.56 Stafford Court (Investment) $4,406,000 67,723

8. 271072 Ontario Inc. 1477 Bishop Street North $2,017,400 65,305

Upcoming New InventoryDEVELOPER & ADDRESS COMPLETION APPROXIMATE

SIZE (SF)

9. 2396004 Ontario Inc.129 Pinebush Road Q4 2017 33,183

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SIZE (SF)

1. JWC530 Manitou Drive Headlease 275,000


City of KitchenerKitchener’s industrial market activity continues to be constrained by the lack of quality Class A space available to both tenants and prospective buyers. Most available options comprise older Class B and C space, or buildings that are poorly sized for demand requirements. Industrial users actively seek opportunities in the neighbouring City of Cambridge due to its superior Highway 401 proximity.

Trends > Much of the available space is functionally challenged or obsolete; these facilities present opportunities for redevelopment or adaptive reuse to attract tenants.

> Industrial growth in Kitchener remains stagnant due to the lack of developed industrial land. The City of Kitchener had been the primary land developer; private developers have not stepped up.

> Limited supply of in-demand spaces is making it difficult for users to find suitable options.

> Market activity will slow with very limited availability - both for sale and for lease.

Summary Statistics Kitchener Industrial Market 2017 Q2 2017 Q3 Trend


Net Absorption 75,672 26,078




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SIZE (SF)

2. Skyline780 Wilson /45 Goodrich Dr.* $14,850,000 131,134

3. 2242907 Ontario Inc.352 Maple Avenue $2,275,000 81,500

4. Blue Top Properties Inc.825 Trillium Drive* $4,550,000 59,428

5. Taylor Made Holdings Ltd.965 Wilson Avenue $2,375,000 45,054

Upcoming New InventoryADDRESS COMPLETION APPROXIMATE

SIZE (SF)

6. Catalyst 137 Kitchener Inc.137 Glasgow Street Q1 2018 475,000

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City of WaterlooThe smallest and least active industrial market of the three cities in the Region, Waterloo is challenged by distance from Highway 401 and limited industrial development opportunities. Over the past decade, Waterloo’s industrial inventory has decreased as many facilities were repurposed to accommodate the explosion of office and technology users. The remaining inventory trends to light industrial uses and demand rests largely on users who are already in Waterloo.

Trends

> Waterloo’s declining inventory has stabilizedd as BlackBerry-influenced conversions and demolitions cease.

> New development/construction will be limited to small additions to the existing facilities.

> Activity in Waterloo has been, and will continue to be, dominated by users who are already located in and wish to remain in the City of Waterloo.

> Growth is limited by lack of shovel-ready industrial land.

Summary Statistics Waterloo Industrial Market 2017 Q2 2017 Q3 Trend


Net Absorption 98,010 -51,894




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SIZE (SF)

1. Sinco Food Equipment146 Dearborn Place Headlease 16,000

2. University of Waterloo663 Colby Drive Headlease 7,987


SIZE (SF)

3. 500 Dotzert Ltd.500 Dotzert Court $2,525,000 21,903

4. Grin & Grind Holdings Inc.642 Colby Drive $1,150,000 8,216

Upcoming New InventoryADDRESS COMPLETION APPROXIMATE

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Glossary

Weighted Average Asking Net Rent The dollar amount requested by landlords for direct available space, not including subleases, expressed in dollars per square foot per year.

Availability The amount of available space and available space to be delivered to the market within six months, divided by the market’s inventory base including those future deliveries. Available space is space that is available for lease, and may or may not be vacant.

Net Absorption The net change in physically occupied space between the current measurement period, and the last measurement period. It can be either positive or negative.

Vacancy The amount of vacant space divided by the building inventory base. Vacant space is physically unoccupied, and it may or may not be available for lease or sublease. This is physical vacancy. It is not determined whether a tenant is paying rent on the space.

Copyright © 2017 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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MARKET CONTACT:Serguei Kaminski Market Intelligence Coordinator | Waterloo Region+1 519 904 [email protected]

REGIONAL AUTHORS:Ron Jansen | Vice President, Sales RepresentativeKarl Innanen, CCIM | Managing Director, BrokerSerguei Kaminski | Market Intelligence CoordinatorJennie Ross | Client Project Coordinator

Colliers International | Waterloo Region305 King Street West, Suite 606Kitchener, ON N2G 1B9 | Canada

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Q3 2017 Waterloo Region Industrial Market Report

Real Estate

Transcript of Q3 2017 Waterloo Region Industrial Market Report