GTA Land and Industrial Sectors Boost Investments In The Third Quarter
Q3 2019 registered a total of 599 investment property sales transactions over $1 million, representing a total investment value of $5.1 billion. Total investment volume year-to-date declined by 8% to $15.1 billion compared to $16.4 billion in the same period last year.
Trade disputes, geopolitical uncertainties, disruptions in the energy sector and supply constraints were some of the contributing factors to moderate economic growth in Canada. However, Toronto remains one of the top-performing markets in North America. According to Altus Group’s Investment Trends Survey in Q3 2019, investment momentum remained positive, and cap rate spreads narrowed as market fundamentals, and investor demand remained strong.
Despite the decline in volume, the number of deal counts was on the upswing for the second straight quarter. An active market represents continued confidence and optimism in the GTA market, attracting capital to the market as investors pursue desired assets and stable returns. The third quarter saw for the first time, three asset classes top the $1 billion dollar mark, which accounted for 65% of all investments recorded this quarter; the industrial sector made its first-ever appearance, alongside the ICI land and residential land sectors.
Total industrial investment volume and total deal count year-to-date also saw positive growth compared to the same period last year, with increases by 13% and 3%, respectively. The industrial sector saw its strongest quarter ever in terms of investment volume, just over $1.1 billion, and the second strongest quarter in terms of deal counts with 142 transactions, slightly behind the record posted in Q4 2018. The GTA market saw continual record low vacancy rates at 0.6% in the third quarter with e-commerce continuing to fuel demand for warehouse space in the ever-growing GTA population. However, the most notable sale this quarter was not your typical warehouse or logistics property, but a purpose-built data center in Richmond Hill purchased for a total consideration of $215 million.The rapid development and implementation of 5G networks and IoT technology have also led to a higher demand in industrial facilities to accommodate additional infrastructure and equipment for deployment of the technology. According to results from Altus Group’s Investments Trend Survey this quarter, respondents continue to favour industrial assets and industrial land.
Collectively, the land sectors (residential, ICI and residential lots) accounted for $6.6 billion year-to-date, which was slightly higher than the same period last year. In the third quarter, the total volume for the land sectors was $2.2 billion, which matched the amount recorded in the previous quarter, but with some fluctuations within the three land types.
The residential lots sector saw a 13% increase in volume year-to-date to almost $495 million. However, in the third quarter, the sector saw a significant drop by 98% in investment volume compared to the previous quarter due to a lack of activity as deal counts were also low. Activity in residential land declined by 10% for investment volume and 24% for transactions year-to-date compared to the same period last year. Q3 activity remained relatively healthy compared to the same period last year, with 109 transactions recorded, a 34% increase. Investment volume amounted to $1 billion, which represented a 65% increase compared to the same period last year. Once again, future high-density re-development sites lead the way accounting for 71% of the $1 billion. The most notable transaction this quarter was the sale of a 0.566-acre site purchased for $171 million in the upscale Yorkville area of Toronto and resulting in a price per square foot buildable of $677 based on the current intentions, a high-end residential condominium tower.
The ICI land sector recorded a slight increase in volume year-to-date totalling approximately $2.3 billion from $2.2 billion last year. In the third quarter, the sector saw a total of $1.1 billion, marking the second time this sector has broken the billion-dollar mark in a single quarter since Q2 2018. The main factor for the high investment total was the $690 million sale of the East Harbour Lands, a 37.9-acre site situated just east of Downtown Toronto. The property, which was acquired by Cadillac Fairview, is planned to be a mixed-use development comprising of up to 17 buildings ranging in height from 8 to 50 storeys. The $690 million sale price represents the largest transaction seen so far this year in Ontario. Another major factor of the robust quarter was the investment in industrial land, with 26 transactions worth $258 million.
The year-to-date investment volume for the apartment asset class declined by 21% compared to 2018, however deal counts remained the same. In the third quarter, the apartment sector registered a total of $577 million, a 54% decrease in comparison to the record-setting same period last year. The largest sale this quarter was the 50% interest share of a 466 unit rental property in midtown Toronto acquired for $114 million by RioCan REIT, who now owns a 100% interest stake in the property. Slower investment totals this quarter were not attributed to the lack of confidence in this asset class, but likely a result of investors retaining and re-positioning their current multi-family asset through improvements and rental increases. Respondents from the Altus Group’s Investment Trends Survey in Q3 expressed the most positive momentum for suburban multi-unit residential assets in the Toronto market where demand for this market remains strong due to overall housing affordability and overall preference for higher density living rises, making this asset class attractive to investors.
Year-to-date investment volume in the retail sector declined by 11% compared to the same period last year, while deal counts rose by 6%.142 retail transactions were registered in the third quarter worth $494 million this quarter. The retail and industrial sectors had the highest number of assets traded in the third quarter. As we continue to see a changing landscape in the retail sector, landlords must continue to evolve and adapt by continually re-positioning these assets to maximize their returns. The largest transaction this quarter was the sale of a 65,647 square foot auto dealership that was acquired by Automotive Properties REIT for a total consideration of $36.5 million.
Year-to-date volume and deal counts in the office sector showed a decline of 20% and 4%, respectively. With low vacancy rates in the GTA and Downtown Toronto at 7.0% and 3.4%, respectively, office assets continue to be a desired commodity amongst investors. Total office transactions saw an increase for the second straight quarter, but like the retail sector, increased transaction activity did not result in higher investment volume. Weaker investment volumes in the third quarter can be attributed to investors retaining their current assets and the absence of significant properties trading, as seen in previous quarters. The largest transaction this quarter was the $124 million sale of a 192,036 square foot, 19-storey multi-tenant office building sold by Artis REIT and acquired by a private Canadian investment corporation.
Purchaser activity once again this quarter was predominantly comprised of private Canadian based investors. Institutional buyers continued their acquisitions of larger assets, supported by the two largest transactions seen this quarter. Amidst geopolitical concerns and fears of a recession, investors remain confident in core Canadian markets, with the GTA being a preferred investment market, and investors continue to search for higher-yielding opportunities and value-added investment strategies by capitalizing on rising demands, limited supply as well as rental growth.
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