Industrial Outlook Canada | Q4 2015

JLL | Canada | Industrial Outlook | Q4 2015

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Overview of JLL’s logistics and industrial services From manufacturing plants to around-the-clock distribution centers, industrial real estate is the backbone of the global economy. Today’s financial and competitive pressures demand that your industrial property—whether leased or owned—delivers maximum flexibility and efficiency. Our logistics and industrial professionals understand the current business environment and offer innovative, profitable strategies for supply chain optimization, site selection, sales, leasing, acquisition, financing, construction, project management, and property and facility management of industrial properties and portfolios.

Our experts know all of the issues that impact your industrial real estate decisions and apply proven best practices to address such challenges as skyrocketing energy, transportation, and labor costs; heightened security needs; tough new environmental requirements; and profound changes in global supply chains. Because of our depth of in-house talent, we can quickly assemble just the right team for your particular need. Regardless of the size and scope of the assignment, you will have a single point of contact who manages all service delivery and is responsible for producing the measurable results that are agreed to up front.

More than 290 JLL professionals cover the top 50 industrial markets in the United States and 700 more are at work in major industrial markets around the globe. In 2014, JLL logistics and industrial services completed more than 2,890 transactions comprising over 196 million square feet of space at a value of more than $5.0 billion.

Canada industrial property clock

4

Canada economic overview

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Canada local markets

About JLL

Greater Vancouver Area

7

Greater Calgary Area

8

Greater Edmonton Area

9

Greater Toronto Area

10

Greater Montréal Area

11 13

JLL | Canada | Industrial Outlook | Q4 2015

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Canada industrial property clock

Calgary

Edmonton Canada

Peaking market

Falling market

Rising market

Bottoming market

Vancouver Toronto

Montréal

Ottawa

Reading the clock JLL’s office clock demonstrates where each market sits within its real estate cycle. Markets generally move clockwise around the clock. Geographies on the left side of the clock are generally landlordfavourable, while markets on the right side of the clock are typically tenant-favourable.

JLL | Canada | Industrial Outlook | Q4 2015

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Canada economic overview The global economy grew at its slowest pace since the financial crisis, despite advanced economies growing at their fastest pace since 2010. The sub-par growth was attributable to emerging market economies as they struggled with plummeting commodity prices, capital outflows and a continued slowdown in China. The global economy is forecasted to grow at just 3.1 percent in 2015 and 3.3 percent in 2016. After a dismal start to 2015, Canada’s economy posted a healthy 2.3 percent annualized gain in the third quarter. Strong exports, firm consumer spending, and a buoyant housing market supported the bounce back after two consecutive quarters of negative GDP growth. It appears the bounce back in the third quarter was only temporary, as the Canadian economy is anticipated to end 2015 on a soft note, with real GDP forecasted to grow at 1.3 percent in the fourth quarter and the Canadian economy forecasted to grow at just 1.2 percent in 2015, making it the worst performance since 2009. The economy is expected to pick up the economic slack in 2016 and 2017, growing at 1.7 percent and 1.8 percent respectively.

prosper demand in both British Columbia and Ontario, offsetting the weakening conditions in the energy dependent provinces – Alberta and Saskatchewan. Momentum in the housing sector is anticipated to continue, with historically low interest rates fueling demand well into 2016. Canada’s core inflation rate remained above the 2.0 percent midpoint of the Bank of Canada’s (BoC) target range for 15 consecutive months; however, the BoC stated that it discounted the persistence of the core measure due to the depreciation of the Canadian dollar, which likely inflated the core rate by 0.5 to 0.7 percent. The headline rate remained at the lower end of the target band at 1.0 percent due to stark energy prices. The Bank of Canada held the overnight rate at 0.5 percent in January 2016 and is anticipated to continue to hold the rate throughout 2016, until concerns regarding the inflation rate exceeding the target rate become more prevalent.

Despite the underwhelming economic performance, the Canadian labour market posted gains of 158,000 in 2015 or 0.9 percent, slightly above the growth rate of 0.7 percent in 2014. Notwithstanding the gains in the labour market, the unemployment rate rose by 40 basis points to 7.1 percent as approximately 110,000 new participants entered the workforce. British Columbia had the strongest employment gains in 2015, up 52,000 or 2.3 percent. At a national level, the largest declines in employment were seen in the support sector for mining and oil and gas extraction; while the largest gains (5.2%) in employment were realized in professional, scientific and technical services. The Canadian dollar currently stands at an 11-year low. Tumbling oil prices, diverging growth outlooks and expected interest rate differentials have all pushed the value of the Canadian dollar lower relative to its U.S. counterpart. Given the weakened Canadian dollar, exports are anticipated to see a boost in 2015 and 2016; however, trade numbers to date have been disappointing, indicative of the slow start the U.S. economy experienced in the first quarter of 2015. Fortunately, the U.S. economy appears to be gaining momentum, boding well for Canadian exports in the second half of 2015 and anticipated to continue into 2016. All in all, total exports are forecasted to increase by 3.1 percent in 2015 and 3.6 percent in 2016, down from 5.4 percent in the previous year. Canada’s housing market defied expectations in 2015, with national home sales increasing by 5.5 percent and national house prices increasing by an average of 12.0 percent. The historically low interest rate environment and strong homebuyer demographics have helped JLL | Canada | Industrial Outlook | Q4 2015

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JLL | Canada | Industrial Outlook | Q4 2015

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Greater Vancouver Area

An active finish to an active year

Large bay lease transactions continue into Q4 Strong activity in terms of large bay lease transactions continued from the third quarter, with New Westminster and Richmond seeing the largest deals transact. Arc’teryx Equipment Inc. leased 243,610 square feet at 425 Boyne Street in New Westminster, a location adjacent to Highway 91A, while, Ingram Micro Logistics L.P. leased 125,299 square feet at 1700 No. 6 Road in Richmond. Both deals signal that demand remains for large bay buildings, and that companies are willing to look in new markets to accommodate that demand. Vendors remain in a position to demand higher sale prices from investors With limited supply on the market for sale, sustained demand continues to put upward pressure on sale prices for industrial land and buildings within Metro Vancouver. Notable sales in the fourth quarter include a private investor purchasing 57,180 square feet at 12431 & 12451 Horseshoe Way in Richmond for $10,000,000 and in Delta, 904-908 Cliveden Avenue, Yegre EB Ltd. purchased 63,084 square feet. Both purchases, one by an individual investor and one by an investment company, indicate that although cap rates remain low, investors still find commercial properties to be enticing investment vehicles. Subsequently, with the cost of financing still at attractive rates, investors will likely continue to compete for the limited supply for sale in the market.

Vacancy compressing quarter to quarter

24 basis points Decrease in the average vacancy rate from Q3 to Q4 Source: JLL Research

Notable lease transactions in in the fourth quarter Tenant name

Address

Arc’teryx Equipment Inc.

425 Boyne Street, New Westminster

Deal type

Size (s.f.)

New

243,610

Ingram Micro Logistics L.P.

1700 No. 6 Road

New

125,299

Amazon Canada

4242 Phillips Avenue, Burnaby

New

87,216

Source: JLL Research

Industrial land sales hit a four year high $400,000,000

Price per acre

Competition for available space pushes vacancy rates downward A continued demand throughout Metro Vancouver for available space, both from new entrants to the market and businesses looking to expand, has caused vacancy rates to trend downward. For municipalities such as Vancouver and Richmond, where vacancy rates are currently at 1.9 percent and where no new supply came to the market in the fourth quarter, tenants are feeling the squeeze. This demand will be slightly alleviated by new construction coming to the market in the first quarter of 2016; notably, there will be 57,628 square feet at 955 East Hastings Street in Vancouver developed by Wall Financial and there will be 147,378 square feet at 1115 Silver Smith in Richmond developed by Beedie Development Group.

$300,000,000 $200,000,000 $100,000,000 $0

2012 Source: JLL Research, RealNet

2013

2014

2015

181,007,784

735,142

1,317,053

$8.78

Available for sublease (s.f.)

New supply (s.f.)

Q4 absorption (s.f.)

Average net asking rate

3.8%

4,612,569

6,163,582

5.88%

Direct vacancy

Under construction (s.f.)

YTD absorption (s.f.)

YOY % change JLL | Canada | Industrial Outlook | Q4 2015

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Greater Calgary Area

Industrial market holds steady amidst oil price drop

New supply climbs as construction boom comes to a close 2,493,637 square feet of new supply hit the market in Q4, of which 60 percent was spec development. The majority of this new supply is catered towards large tenants, with that said, a wide array of A class product will be available for big box users for the foreseeable future. These large vacant pockets are the most worrisome for developers and landlords. In addition to some companies putting the pause button on the Calgary market, excess sublease space and the volume of competition will put downward pressure on rates until demand catches up with supply. Submarket trends remain the same To little surprise, the South Central market has remained very active. This is in large part due to the size of the product (relatively smaller) and it’s ability to attract versatile users. The North East while boasting the highest vacancy rate, is also home to some of the largest oncoming projects in Oxfords Airport Business Park and WAM’s Stonegate Landing. With both parks designed for big box users, vacancy rates are expected to climb into the majority of 2016. It’s a familiar tale in the South East as big box projects from WAM and Hopewell possess the risk to sit vacant for a while once they hit the market.

Historical vacancy 8.0% 6.0% 4.0%

5.6%

4.9%

5.0%

2010 2011 Source: JLL Research

2012

6.5%

6.1%

5.8% 4.3%

2.0% 0.0% 2013

2014

Q3 2015 Q4 2015

Absorption and new supply 6,000,000

Absorption

New Supply

4,000,000

s.f.

Global decisions impacting local conditions While international oil politics continue to put a strangle hold on Alberta’s economy, the province is stuck trying to find a solution to a problem out of their reach. Insert a new NDP government with a questionable budget and the word “recession” has begun to linger in the region. Despite all this, Calgary’s industrial market has managed to weather the storm as absorption for Q4 was a positive 883,660 square feet. It’s no question the oil and gas sector (roughly 30% of the market) has gone quiet, however in its absence other areas, most notably distribution, has remained strong and active. The city’s growing importance as a distribution hub for Western Canada is often overlooked by those outside the industry as it continues to emerge as one of the newer economic engines.

2,000,000 0 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015 Source: JLL Research

Vacancy, by submarket Airdrie/Crossfield

2.7%

Southeast

4.9%

Northeast/Balzac Central

12.3% 1.8%

0.0% 2.0% Source: JLL Research

4.0%

6.0%

8.0% 10.0% 12.0% 14.0%

141,453,735

883,660

$10.04

9.0%

Total market size (s.f.)

Q4 Net absorption (s.f.)

Average asking net rents

Availability rate

6.5%

940,875

-1.9%

3,010,531

Total vacancy

2015 Net absorption (s.f.)

Q/Q rent growth

Under construction (s.f.) JLL | Canada | Industrial Outlook | Q4 2015

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Greater Edmonton Area

Uncertainty lingers in the fourth quarter Availability on the rise as uncertainty grows The Alberta industrial market finished the year with great uncertainty and will continue in this direction as we begin 2016. Numerous factors are causing this, including an unproven new government, both at the provincial and federal levels; lower Canadian dollar which is weakening our national economy; and most importantly the declining oil & gas markets, which will likely stay low throughout the majority of 2016. As a result, we have seen total availability increase from 2.6 percent in Q1 to 4.8 percent, presently.

Total inventory by submarket (s.f. millions) 4.77.3 6.4

51.6

Northeast

Southeast

Central

Northwest

Leduc / Nisku

Other*

57.2 3.7 Source: JLL Research

Construction on hold as economy stagnates The region has seen a significant decline in new industrial construction. On one hand, projects that commenced before the economic downturn have continued to trudge along or come to completion. On the other hand, most groups have decided to hold off on new projects until things pick back up. We have seen a significant decline in total area under construction since Q4 2014 when the figure sat at 2,460,633 square feet, and now sits at 729,922 square feet. This is due largely in part to the number of projects that have come to completion in the third and fourth quarters. In total, 18 buildings have completed in Q3 and Q4, for a total of 2,354,863 square feet.

*Acheson, Stony Plain, Sherwood Park, St. Albert, Spruce Grove Average rental rate by submarket $20.00

Net asking rent

Additional rent

$15.00

p.s.f.

Sales activity strengthens as lease activity falls Sales activity during the fourth quarter strengthened as we witnessed five significant transactions all above 50,000 square feet. The largest property sold was the former Aecom facilities in Sherwood Park that totalled 184,776 square feet on 55.39 acres. These top five sales of the quarter produced a total of $62,320,000 alone. The leasing market was a different story; due to the current economic conditions there has been a lack of larger transactions to take place. We have only witnessed two leases commence this quarter above 50,000 square feet, while the smaller to mid sized bays continue to be absorbed. Land sale activity also substantially decreased with only eight transactions taking place in the region for a total of 15.99 acres, during the entire quarter.

$10.00 $5.00 $0.00 SE

NW

NE

Central

Leduc / Acheson Nisku

Source: JLL Research

Notable sales Purchaser name

Deal type

Size (s.f.)

Alco Energy Industries

Sale

63,870

1868180 Alberta Ltd.

Sale

122,876

York Realty Inc.

Sale

184,776

Source: JLL Research

1,193,048

$10.07

1,328,300

729,922

Total net absorption (s.f.)

Average net rental rate (p.s.f.)

Population of Greater Edmonton

Total under construction (s.f.)

2,826,397

-0.5%

3.6%

0.6%

2015 YTD net absorption (s.f.)

12-month percent change

YOY change in jobs

Percentage of total inventory JLL | Canada | Industrial Outlook | Q4 2015

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Greater Toronto Area

A stable finish to 2015

Solid demand for warehouse and logistics facilities With 67 of the 102 total market sales in the fourth quarter, industrial users accounted for the majority of building sales in the GTA, with private Canadian investors making up the second largest demographic with 31 market transactions. Warehousing and distribution facilities made up 56 percent of all sales regardless of investor type, highlighting the continued importance of warehousing and logistics to the economy of the GTA. The average sale price per square foot was $129.83 across the GTA in Q4, roughly on par with the GTA west, but trailing the $138.33 per square foot GTA North average sale price.

Notable leases

Landlord leverage

Greater Toronto Area property clock

GTA West GTA North GTA Central

Source: JLL Research

Peaking market

Falling market

Rising market

Bottoming market

Tenant leverage

Steady leasing activity through 2015 Leasing activity in the GTA remained steady through the end of 2015, with 604 deals closing in the fourth quarter for a total of 6.8 million square feet, a slight decrease in leasing activity from the previous quarter. The 868,122 square foot Amazon lease at Orlando’s newly built 8050 Heritage Rd. property was the largest of the nine lease transactions over 100,000 square feet recorded in the fourth quarter. Even though availability rates registered a slight ten basis point increase over the previous quarter to 4.2 percent, this was largely driven by new speculative construction. Average net asking rental rates continued their steady growth to $5.82 per square foot across the GTA.

GTA East

Tenant name

Deal type

Size (s.f.)

Amazon

New

868,122

Sherway Logistics

New

329,864

Accuristix

New

280,000

DST Output

New

232,454

Source: JLL Research

A lack of land drives industrial development to outlying regions The GTA industrial market continues to experience substantial new development in outlying regions where land is more readily available and infill redevelopment and renovation in land-starved municipalities such as Brampton and Mississauga. Milton and neighboring Halton Hills are currently experiencing the biggest boom in speculative construction, with nine percent of their total industrial stock currently under construction. Another major development which will impact new construction is the Greater Toronto Area West Transportation Corridor Project. While still in the planning stage, the project will feature a 400 series orbital freeway running from Milton to HWY 400 north of Vaughan and will factor in the decision making process of developers and tenants alike.

Notable industrial development Project

Size (s.f.)

Est. Delivery

8050 Heritage Road, Brampton

868,122

Q1 2016

11400 Steeles Ave E, Halton Hills

639,838

Q2 2016

8500 Mt. Pleasant Way, Milton

410,000

Q2 2016

8640 Mt. Pleasant Way, Milton Source: JLL Research

434,213

Q1 2016

773,699,366

3.2%

5,962,132

$5.82

Total inventory (s.f.)

Total vacancy rate (s.f.)

Under construction (s.f.)

Average net rental rate (p.s.f)

4.2%

1,472,433

61% vs. 39%

$3.05

Total availability rate (s.f.)

Q4 net absorption (s.f.)

Spec construction vs. design-builds

Average T.M.I. (p.s.f.)

JLL | Canada | Industrial Outlook | Q4 2015

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Greater Montréal Area

Fourth quarter showing signs of optimism for GMA Vacancy rates hit lowest in over two years After a slow start to the year that resulted in almost 1 million square feet of negative absorption along with record-high vacancy rates, year end saw a complete turnaround. Total vacant space dipped to approximately 19.6 million square feet and the vacancy rate, in turn, dropped to 5.6 percent. Both figures are at their lowest since the first quarter of 2013, when vacant space stood at 18.6 million square feet and the vacancy rate at 5.3 percent.

Developers continue to see opportunities in off-island sub-markets With the island of Montreal filling up and vacant land being put to more high-density residential uses, developers have begun construction of industrial projects outside the island, particularly in the northern, southern and western sub-markets. In the fourth quarter alone over 1.3 million square feet of industrial projects were completed. In addition, 1.2 million square feet are still under construction with completions slated for 2016. One particular sub-market, Vaudreuil-Dorion, is establishing itself as the new up and coming industrial sector with over 600,000 square feet of construction underway. Aging industrial inventory attracting new investments Being one of the oldest industrial cities in the Western world could be a blessing in disguise for the Greater Montreal Area. With low interest rates and a tumbling Loonie, Montreal could see a surge in new investments, particularly foreign, in to its aging infrastructure. The East End of Montreal has already embarked on its plan to modernize its industrial parks by developing programs such as ’PR@M-Est’, ‘PR@AM-Industry & ‘PR@M-Innovation to spearhead development and modernization.

Historical vacant space (s.f.) in the Greater Montréal Area 21,000,000 20,000,000 19,000,000 18,000,000

Source: JLL Research

Notable industrial developments Project

Size (s.f.)

Est. Delivery

F.X. Tessier

500,000

Q3 2016

3801 F.X. Tessier

145,120

Q2 2016

2985 Douglas-B.-Floreani

65,000

Q3 2016

Source: JLL Research

Greater Montreal’s industrial inventory is aging

122,231,342 s.f. Industrial buildings built before 1970

38% Percentage of total industrial inventory built before 1970 Source: JLL Research, Economic Development East-End

41,707,917

5,233,577

1,862,186

1,235,120

Market inventory (s.f.)

Total available for sale (s.f.)

Net absorption (s.f.)

Total under construction (s.f.)

7.3%

$71.51

1.9%

2,139,547

Direct availability

Average asking sale price ($/s.f.)

Net rental rates YOY change

Total preleased (s.f.)

JLL | Canada | Industrial Outlook | Q4 2015

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JLL | Canada | Industrial Outlook | Q4 2015

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For more information, please contact: Thomas Forr Research Manager +1 416 304 6047 [email protected] www.jll.ca/research About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $57.2 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com. About JLL Research JLL’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. ©2016 Jones Lang LaSalle IP, Inc. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of Jones Lang LaSalle. The information contained in this document has been compiled from sources believed to be reliable. Jones Lang LaSalle or any of their affiliates accept no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this document.

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