how the 2008 global recession impacted industrial real estate

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Where we stand today

How the recession impacted Greater Toronto Area industrial real estate

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In September 2008, global financial services firm Lehman Brothers filed for Chapter 11 bankruptcy protection, an event which marked the beginning of the global recession.

To help better understand the recession’s continuing economic consequences for industrial real estate, American Appraisal analyzed 2500 industrial real estate sales (see appendix) in the Greater Toronto Areas (GTA) from 2007 to mid-2013.


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Market recovery

From a macro perspective, recent transaction prices are returning to levels not seen since 2007. This said, the picture of market health varies depending on which metric we look at, dollar volume or sales volume.


Overall market health

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Indicator 1/2: dollar volume This measure indicates market activity has not yet returned to 2007 levels

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2007 2008 2009 2010 2011 2012 2013

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GTA - Total Amount ($Billions) of Industrial Sales

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General Purpose Light Industrial


• Total sales declined to $947 million in 2009, plunging ~60% from $2.4B in 2007

• The market began trending upwards in 2010, recording sales of $1.8B in 2012

• Activity during the first half of 2013 suggests continuing recovery

• In 2012, general purpose light industrial real estate accounted for 61% of the total dollar value of all GTA industrial real estate sales, a significant increase from 35% in 2007

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Indicator 2/2: sales volumeWhen we focus on the number of properties sold, we see a full market recovery

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2007 2008 2009 2010 2011 2012 2013

GTA - Quantity of Industrial Sales

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• 2009 was the slowest year for the GTA overall

• By 2012 the markets had improved and surpassed the 2007 peak

• Note: A single transaction may represent more than one building or property

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A few interesting and unexpected real estate trends in the GTA’s industrial real estate have come about in reaction to the recession.


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Macro trends

2. Shrinking building size It is too early to proclaim a permanent market shift, but nonetheless, it’s important to note there were more transactions of smaller-sized properties in 2012 than in any other year of the study period.


1. Unit priceRecovery is well underway when we look at the average unit price:

• In 2007, the average was $84/SF, a measure that reached its bottom—$65/SF—in 2010

• By 2012, the industrial real estate market had climbed to $76/SF• By mid-2013 it had finally returned to its 2007 price levels

Once we factor in inflation, we see that unit price is still slightly short of full recovery; the benchmark would be $94/SF in 2013.

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4. Better-than-2007 unit priceBy mid-2013, the average unit sale price for all industrial real estate had recovered to 2007 levels, but the unit price of general purpose light industrial had achieved an 11% increase over 2007 levels. This appears to be attributed to the price growth in Halton and York Regions, as discussed in the regional market analysis in the coming slides.

Macro trends


3. Higher number of salesAlthough the total value of GTA’s industrial sale transactions is currently less than it was in 2007, the quantity of sales has surpassed pre-recession levels, indicating a decline in average building size being purchased, i.e. from 69,063 SF in 2007 to 52,455 SF in 2012.

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When looking for regional trends, several things distort the unit price metric, such as size, construction type and site density.

To develop meaningful trend data, our analysis of the regional sales concentrated on the general purpose light industrial properties.

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1. Best returnHalton Region showed the best return, with a spike of 19% in the average unit sale price between 2007 and the first part of 2013

2. Least volatilityThe price increase in Halton Region was the most significant over the study period, yet this market was also remarkably stable. Halton showed the least volatility overall, with a difference in the average unit sale price between its all-time high of just $18/SF (i.e. $71/SF in 2007 and $89/SF in 2013), compared to the $24/SF difference recorded in York and Durham Regions over the same period.

3. Hottest marketThe region in which the greatest number of general purpose light industrial buildings sold during the study period is Peel Region. With 542 properties sold, Peel is the hottest market. Toronto is the runner-up with 509 transactions.

Top performer Performance can be measured using several variables including volume and unit sale price.


How the regions reacted

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Responsible for just 5% of the GTA’s total industrial real estate transactions, Durham Region showed the most volatility during the study period, with a spread of over 55% between its highest average unit sale price ($67/SF in 2010) and its lowest ($43/SF in 2011).

Although this change took place over a single year, we do not consider it indicative of a trend given the modest number of sales recorded annually in the region.

Bumpiest rideAs with our Top Performer category, we’ve looked at general purpose light industrial properties.



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1. Highest sales volume Sales volume can be measured by looking at either the number of properties sold, or the dollar value. In both cases, Peel Region leads with the highest sales volume: $3.7B spent on 852 total industrial property sales, including $1.8B spent on 542 general purpose light industrial properties during the study period.


Greatest market breadth and strength As with our top performer category, we’ve looked at general purpose light industrial properties.


2. Highest unit sale priceYork Region recorded the highest price of $96/SF for general purpose light industrial properties by mid-2013.

3. Biggest increase in the average unit sale priceHalton Region showed the biggest increase (19%) in the average unit sale price of general purpose light industrial properties over the study period.

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As a whole, industrial real estate in the GTA has recovered to 2007 levels. There are different indicators of this, including the number of properties sold (recovered) and dollar volume for overall sales (near-to-complete recovery).

Regionally, while Toronto and York sales have contributed to the overall recovery, Peel and Halton have played the leading role. Durham, on the other hand, is the region most profoundly impacted by the recession.

For the full study visit http://www.american-appraisal.ca/study.htm


http://www.american-appraisal.ca/study.htm

http://www.american-appraisal.ca/study.htm

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For this study, American Appraisal analyzed 2,500 industrial real estate sales, in four categories:

• purpose built, owner occupied, special use facilities;• distribution warehouse centers;• general purpose storage/shop buildings, manufacturing/assembly plants, and; • multi-tenant income-producing industrial properties.

Appendix: The data set


how the 2008 global recession impacted industrial real estate

Business

industrial real estate

average unit price

gtas industrial real

unit price recovery

average unit sale price

unit price metric

price increase

sales volume