Examining the GTA’s New ‘Darling’ Asset Class

The last financial crisis is something few people wish to bring back top of mind. Fear, uncertainty, risk; are all words that could describe it. Yet for Real Estate professionals there may be one word even more painful; gridlock.

For investors, it was uncertain risk exposure coupled with a weak market into which to liquidate assets or secure debt. For developers, it was much the same but with perhaps more headaches stemming from operations, suppliers, labour, and regulations. For brokers, it meant low market velocity and deal volume slowing to a trickle… not something a commission-based professional wants to see.

Those who made it through and to the other side were toughened, sharpened, and rewarded with one of the longest ‘bull markets’ in recent economic history; not just in Canada or the United States, but globally.

With every market expansion comes a season of opportunity, prosperity, and unbridled optimism. Reflected in this is often a surge in market activity, new development, and record-breaking asset prices. Businesses grow and expand their operations into new markets. Investors scoop up discounted assets and deploy capital into value creation. Developers bring fresh supply and keep the market in balance.

The Greater Toronto Area has experienced more than its fair share of all-time lows and highs (almost all of which were net positive for those involved) and has ridden its way to the top of many conversations concerning the best places to live, work, and invest. The effect has been a boom in housing prices, as well as commercial space and land; with strong and growing expectations for each.

Expectations surrounding the Industrial Market in 2020, in particular, are as one-sided as they have ever been since the crisis.

With market indicators such as rental rates, prices per SF, inventory, and absorption all pointing to a red-hot market… how could you not share this belief?

However, this ‘all-in’ mentality has been seen before, in other markets, and in other asset classes. It typically precedes a correction, not because those markets were weak, but rather, because they had one or two faulty points; often a symptom (or cause, in some situations) of the rapid growth itself.

The development of any system, market, or economy takes considerable and sustained positive growth over an extended period of time. Time needed to adjust and assess risk. Time needed to see projects through the entire process to completion. Time needed to understand the effects of new industries and changing technology.

There is no doubt that the Greater Toronto Area is a strong and growing market. What has come to question are the lofty projections and general frothiness. This new speed and these new heights may not be the reality of the market itself, but rather, the narrative we are all telling on panels, on social media, and at industry events.

And so, I will be the one to temper expectations and pose the question(s) that few are willing to ask. Or perhaps, they are not on anyone’s mind. Because, if true, could bring to light certain risks that have been overlooked or assumed in many a pro forma.

Are we truly in an overheating market, or are we just caught in the perfect storm?

How to answer this question will depend on how you operate within the market, your definition of the corresponding terms and concepts, as well as your personal preferences.

For this specific discussion, however, we are going to focus on three (3) key market indicators that we believe – if any one of the three were to fail – would create a reversion back to a lower equilibrium.

Today, we are in the first part of our series titled’ “State of the Toronto Industrial Market: Overheated or Artificial?”… so let’s dive in…

Key Market Indicator #1: Rental Rates

Are they really as strong as they seem… or are we just playing catch up?

Rental rates are often pointed to as one of the most important metrics when assessing a market’s strength. Looking at Toronto with its Industrial rents’ rapid ascent from $7 to $9 plus, and even low-double-digits… it’s easy to see why people are optimistic.

And generally speaking, seeing high absolute values and steep year-over-year changes does suggest something is going on; although its cause may not be agreed upon by everyone.

On a basic level, rising rates mean that demand is outstripping supply and that Users are competing for a more limited stock of inventory. Reasoning down to first principles, we can then pose the questions of whether:

  • Demand is strong and being driven by an influx of Users;
  • Supply is weak or limited due to regulation, capital, or price signals;
  • We are seeing a combination of both forces at play; or
  • Everything is fine and we are simply catching up to other mature markets.

Looking at historical rent data from Toronto, we can see that Industrial rates have been slow to adjust and remained fairly level for much of the past decade.

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Source: CoStar

When compared to other major North American markets, we see that Toronto has been playing catch up and is actually relatively inexpensive… in some cases lagging $4 or $5 PSF behind markets such as Los Angeles and New York.

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Source: CoStar

Perhaps the story goes like this… Toronto is a fantastic place that nobody had ever heard of. Once the ‘cat was out of the bag,’ dozens of large, multinational businesses decided to expand or relocate, causing the city to compete against markets such as Chicago, Los Angeles, and New York City. Compared to them, Toronto was affordable (and for many reasons, including its growing labour pool and undervalued currency).

Add to this a low-interest-rate environment for well over a decade, and inflation of nominal values begins to become a concern; not only for the rents directly but also for labour and other costs; which begin to put upward pressure on pricing.

With new, higher rents in place, developers could pro forma higher valuations; and the entire asset class was one or two lease cycles from a spike in rents… a new equilibrium.

The cause wasn’t an extreme deficiency or delta in the demand-supply gap, but rather, simply an infusion of creditworthy tenants thinking in terms of pricing from more expensive markets.

Finally, to test our hypothesis… let’s imagine rental rates were flat. Your same, old $7 PSF Industrial rent with 1-2% vacancy…

Would that market look much different from that of 25 years ago?

That market would still be strong, yes, but certainly not viewed with the current overall sentiment.

The success that this city (and region) has experienced is great for everyone lucky enough to call it home. And Toronto is an amazing city with a robust and healthy market. However, let’s not get swept away with notions of irrational exuberance or wishful thinking. Sustained growth at this clip for another 5 to 10 years is not likely, nor desirable.

We cannot predict for certain when the market will stabilize and cycle through its ‘new normal,’ however, we can become aware and look to other indicators to see what this environment may look like as a result.

To conclude, if you are looking to maximize the value of your portfolio or find the optimal space for your business, contact us today.

Luis Almeida is the Senior Vice President and Partner of Lee & Associates Toronto, specializing in the acquisition, disposition, and leasing of industrial properties, as well as providing clients such as local and national corporations, landlords, and developers with a full range of real estate services across verticals and industries.


Lee & Associates is a commercial real estate brokerage, management and appraisal services firm. Established in 1979, Lee & Associates has grown its service platform to include offices in the United States and Canada. Lee & Associates provides superior market intelligence in office, industrial, retail, investment, and appraisal to meet the specialized needs of our clients. For the latest news from Lee & Associates, visit leetoronto.com.

To get clarity and direction when looking to sell your building, or to discuss any other real estate needs, please contact Luis at 416.628.8151, email at lalmeida@lee-associates.com, or visit www.leetoronto.com.