q3 2016 waterloo region industrial market report

Research & Forecast Report

WATERLOO REGIONINDUSTRIAL Third Quarter 2016

2 Research & Forecast Report | Third Quarter 2016 | 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

In 2016, leasing activity in the Region has been soft; many would-be tenants are considering purchase opportunities as low interest rates and relative ease of borrowing continues to position lenders in direct competition with landlords and developers. In some cases, 100 percent financing is available without significant interest rate penalties.

Although the trend has eased somewhat, older, less functional industrial properties continue to be converted to higher and better uses; the most significant recent example is 137 Glasgow Street in Kitchener. This 475,000 square foot warehouse facility, although somewhat functional, faced locational challenges and was often considered a mixed-use residential and commercial redevelopment site. In June, the property was purchased for redevelopment into a tech hub for hardware makers, giving it new life as a non-traditional industrial use. Creative developers continue to revitalize older B class buildings such as 75 Cowansview Road and 1250 Franklin Boulevard by improving them through partial demolition, ‘white boxing,’ lighting and shipping upgrades, and office renovations.

There has been a sharp drop in the vacancy rate since Q1 from 6.85 to 5.04%. Some properties were removed from the inventory altogether, including the remnant buildings from the former Budd Automotive site; 137 Glasgow Street, which is undergoing a dramatic transformation; and 180 Groh Avenue in Cambridge, which has been demolished. Several properties that were sold or leased in the final two quarters of 2015 are now occupied, contributing to the vacancy rate decline.

Although leasing activity has been soft, it has recently climbed in Q3 2016 with just over 520,000 square feet transacted compared to 190,000 square feet in the first quarter, however there has been less absorption of large blocks of space, reversing a 12-month trend towards larger lease transactions; the average deal size is down significantly from just over 15,000 square feet in Q1 to just over 8,700 square feet in Q3.

Market IndicatorsRelative to prior period

Waterloo RegionQ2 2016

Waterloo RegionQ3 2016 Trend

VACANCY 5.05% 5.04%

NET ABSORPTION 345,109 19,293

CONSTRUCTION 51,076 108,962

RENTAL RATE* $5.18 $5.39 Note: Construction is the change in Under Construction. * Rental rates for current quarter are asking weighted averages for all submarkets.

Average asking lease rates continue their upward trend - rising by $0.20 per square foot since the first quarter - an indication that the market supply is weighted towards better quality buildings and that older B- and C-class buildings are being absorbed or removed from the market altogether. This upward rate trend will ease off over the next two quarters as leasing activity in the newer A-class buildings removes much of the high quality space availability from the market.

Sales activity had been dominated by larger transactions over the previous three quarters, but with some availabilities in the more traditional sub-50,000 square foot size, there are finally more typical market deals; average deal size in Q3 2016 was 28,554 square feet compared to 111,261 square feet in Q3 2015 with more user sales activity than investment sales. Pricing has been stable over the past year with an average of $77 per square foot in Q3 2016 compared to Q3 2015. With very few purchase opportunities and steady demand, there will be some upward pressure on purchase price over the next two quarters.

The current trends will continue over the next two quarters as users favour purchase options over leasing, and a steady or slightly declining inventory 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

The industrial investment market continues to be characterized by restricted supply and high demand. There was one investment sale in Q3 of this year: 68 Shirley Avenue, Kitchener that sold for $49 per square foot. The cap rate for this building fell into the current market range of 6.5% to 7.5%. The industrial investment property market is expected to continue to be sought-after by investors with few properties available. Given the limited inventory, prices will continue to rise over the short term.

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. MJ505 Thompson Drive Headlease 41,480

2. 4-Month Lease66 Moorefield Street Sublease 34,880

3. Jeak Logistics1575 Bishop Street North Headlease 14,524

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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.

> Users continue to shift their demand towards higher quality spaces.

> As the vacancy rate hovers in the low 4% range, more design build activity is anticipated.

Summary Statistics Cambridge Industrial Market 2016 Q2 2016 Q3 Trend

Industrial Inventory 31,589,735 31,510,173

Net Absorption 227,245 -92,248

Vacancy Rate 4.42% 4.81%

Average Asking Net Rent(Per Square Foot) $4.94 $5.16

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Notable Sale TransactionsPURCHASER & ADDRESS PRICE APPROXIMATE

SIZE (SF)

4. Dongab Co. Inc.1230 Balmoral Road $2,350,000 77,534

5. Wire To Wire Manufacturing447 Dobbie Drive $2,400,000 52,083

6. West Wind Properties75 Cowansview Road $2,250,000 36,000

7. FNF Enterprises Inc.645 Boxwood Drive $2,045,000 19,865

Upcoming New InventoryDEVELOPER & ADDRESS COMPLETION APPROXIMATE

SIZE (SF)

8. Grerei Investments Ltd.130 Saltsman Drive Q1 2017 50,000

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1. 1 Chandaria Place Headlease 60,000

2. Stance Healthcare45 Goodrich Drive Headlease 41,952

3. Custom Foam Systems501 Manitou Drive Headlease 14,400


City of KitchenerKitchener’s industrial market activity continues to be restrained 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.

> Blue Top Properties’ new spec development at Wilson Avenue and Goodrich Drive brings much-needed Class A space to market; the project has achieved success with over 75% leased.

Summary Statistics Kitchener Industrial Market 2016 Q2 2016 Q3 Trend


Net Absorption 60,290 50,658




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SIZE (SF)

4. Catalyst 137 Kitchener Inc.137 Glasgow Street $21,000,000 475,000

5. Homer Land Corp.530 Manitou Drive $7,000,000 358,499

6. Yibin Holdings Ltd.68 Shirley Avenue $4,965,000 100,958

7. Cividale North America Corp.529 Manitou Drive $5,600,000 87,274

8. Formatop Manufacturing Co.1530 Strasburg Road $4,500,000 74,130

Upcoming New InventoryADDRESS COMPLETION APPROXIMATE

SIZE (SF)

9. 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 Q2 2016 Q3 Trend


Net Absorption 57,574 60,883




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SIZE (SF)

1. Elmira Pet Products50 Northland Road Headlease 57,484

2. Casa Creative Inc.45 Northfield Drive West Headlease 8,574

3. 755 Bridge Street West Headlease 5,090


SIZE (SF)

4. Red Rock (2016) Investments 820-826 King Street North $6,500,000 66,765

5. 611 Colby Drive $1,950,000 36,983

Upcoming New InventoryADDRESS COMPLETION APPROXIMATE

SIZE (SF)

6. Koch Enterprises Inc.617 Colby Drive

Q4 2016 - Q1 2017 22,964

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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 © 2015 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.

Copyright © 2016 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:Karl Innanen | Managing Director, BrokerRon Jansen | Vice President, Sales RepresentativeSerguei Kaminski | Market Intellience CoordinatorJennie Ross | Client Project Coordinator

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q3 2016 waterloo region industrial market report

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