q1 2017 waterloo region industrial market report

Research & Forecast Report

WATERLOO REGIONINDUSTRIAL First Quarter 2017

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2 Research & Forecast Report | First 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

Leasing activity in 2017 is on the rise with several new transactions and, in some cases, competing offers – this was a very rare occurrence in the recent past, but is now happening with more and more frequency. Much of the lease activity is in the 20,000 to 50,000 square foot range and primarily focused on Class B buildings that have been retrofitted with modern finishes and some office build-out already in place. The trend towards newly constructed Class A industrial space has tapered; tenants are focused on improving the quality of their space, but they are taking a more budget-minded approach. The costs associated with office build-out and other tenant improvements are also driving more users to focus on second-generation spaces where they can take advantage of savings from existing improvements.

With a vacancy rate sitting at just 4.72%, many users are finding it difficult to satisfy their requirements. This is especially true for purchase opportunities which remain in very high demand. The cost and ease of borrowing continues to attract would-be tenants to pursue ownership. With some lenders offering high ratio mortgages and competitive interest rates, some users are finding that mortgage payments are the same as or more affordable than their lease payments, putting lenders in direct competition with many landlords. On the leasing side, supply is also limited in many segments. There are few options for tenants to consider, making it challenging to find the right space. With supply falling well short of demand, the market should expect to see more new builds, however both high construction costs and the very long building permit process are stifling this activity.

Pricing on sale and lease opportunities 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 moved slightly from $4.91 to $4.94 per square foot, largely a result of some of the lower cost leasing options being absorbed, leaving more availability in the

Market IndicatorsRelative to prior period

Waterloo RegionQ4 2016

Waterloo RegionQ1 2017 Trend

VACANCY 4.79% 4.72%

NET ABSORPTION 134,234 68,410

CONSTRUCTION 91,507 104,646

RENTAL RATE* $4.91 $4.94 * Rental rates for current quarter are asking weighted averages for all submarkets.

more expensive Class A spaces. Cambridge continues to be the dominant market in the Region with 68% 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.

The Kitchener industrial market remains stable and healthy, however new construction will be limited; the City has long since shifted its economic development activities to other areas and development land in key locations remains scarce.

The City of 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. Waterloo’s distance to Highway 401 remains a challenge for the City in attracting new industrial investment where most users are eager to minimize the time and distance to their customers and suppliers.

The current trends will continue over the next two quarters as users favour purchase options over leasing. There will be a steady or slightly declining inventory level as construction activity remains limited, and older, functionally challenged buildings are removed from the inventory. Lease rates and sale prices will see slight upward pressure, but will remain close to their current levels.

Investment Market

Approximately 650,000 square feet was transacted during Q4 2016 and Q1 2017. The sales included single- and multi-tenanted industrial facilities, flex industrial/commercial malls, buildings that allow investor/user occupancies, and buildings where the new owners intend to refurbish and lease out. The sale prices ranged from $40 to $170 per square foot, with the average being $90 per square foot. Cap rates were within the 6.4% to 7.4% range.

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. RoadTrek125 Royal Oak Road Headlease 248,820

2. Kromet International866 Lang’s Drive Headlease 146,050

3. Nexpac Corporation1250 Franklin Boulevard Headlease 60,445

4. Ball Bounce & Sport75 Cowansview Road Headlease 37,000

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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 2016 Q4 2017 Q1 Trend

Industrial Inventory 31,577,270 31,773,049

Net Absorption -153,587 -72,977

Vacancy Rate 5.26% 5.61%

Average Asking Net Rent(Per Square Foot) $4.63 $4.60

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Notable Sale TransactionsPURCHASER & ADDRESS PRICE APPROXIMATE

SIZE (SF)

5. TSO Alt-Tor Propco GP, LLC17 Vondrau Drive $74,533,372 317,445

6. Dijozi Limited1670 Bishop Street North $3,150,000 61,250

Upcoming New InventoryDEVELOPER & ADDRESS COMPLETION APPROXIMATE

SIZE (SF)

7. Grerei Investments Ltd.130 Saltsman Drive Q2 2017 50,000

8. 2396004 Ontario Inc.129 Pinebush road Q4 2017 33,183

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SIZE (SF)

1. Skyjack1 Chandaria Place Headlease 242,000

2. Heritage Warehousing501 Manitou Drive Headlease 99,400

3. Cosmaroma780 Wilson Avenue Headlease 28,503


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 gain tenancies.

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

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

Summary Statistics Kitchener Industrial Market 2016 Q4 2017 Q1 Trend


Net Absorption 247,120 109,101




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SIZE (SF)

4. Wag-575 Holdings Inc.575 Trillium Drive $2,000,000 32,852

5. Forsyth Family Farms Ltd.110 Hanson Avenue $1,000,000 16,359

6. Balune Launch Inc.91 Trillium Drive $1,840,000 14,717

Upcoming New InventoryADDRESS COMPLETION APPROXIMATE

SIZE (SF)

7. Catalyst 137 Kitchener Inc.137 Glasgow Street Q2/Q3 2017 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 its lack of Highway 401 proximity 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 will stabilize 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.

> Waterloo’s lack of shovel-ready industrial land will continue to limit any growth.

Summary Statistics Waterloo Industrial Market 2016 Q4 2017 Q1 Trend


Net Absorption 11,940 32,286




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1. 1438173 Ontario Inc.675 Davenport Road $3,095,000 43,795

2. FNF Enterprises Inc.70 Rankin Street $1,820,000 37,870

3. 2464793 Ontario Inc.588 Colby Drive $2,095,000 26,071

4. Jmakco Holdings Inc.612 Colby Drive $1,200,000 14,485

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

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q1 2017 waterloo region industrial market report

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