As Brookfield’s North American lead for logistics investment, Andy Smith understands the complexities of transacting in major markets. When it comes to the GTA, Smith sees an opportunity to expand the firm’s industrial portfolio.
Green Street News spoke with Smith on how the real estate giant, headquartered in Toronto, utilizes hyper-local market intelligence to inform its GTA investment strategy.
How important an industrial property market is the Toronto/Greater Toronto Area for Brookfield?
It’s become a big focus for us, particularly given the scale of the market. Toronto is a unique market. Frankly, there’s not really another market in North America that’s like it.
What I mean by that is, one, it’s kind of the gateway to where all product gets dispersed out to the rest of Canada. You can compare it broadly to big American distribution hubs, like the Port of Los Angeles, but then it’s also the largest population in Canada as well. Kind of like a Northern New Jersey.
“There’s not really another market in North America that’s like [Toronto]”
New Jersey obviously has a big port and is a big distribution hub for the northeast part of the U.S. But [Toronto] really is the central point for distribution throughout the entire country, as well as having that more affluent, larger and fairly dense population to be able to service that local demand.
What type of industrial assets are you looking at in the GTA?
It’s very market dependent. Logistics is a very localized business. Frankly, the way we’ve built our business at Brookfield is very different than how most people think about our real estate business. I think most people think of us for large M&A, large portfolio transactions, which certainly we have the capabilities of doing. But we really built this segment of our real estate business on that hyper-local scale.
If you look at your traditional [industrial] pockets of Brampton, Mississauga, Vaughan, we’re very comfortable buying older-vintage product there because the purpose of that product is to [function] as “last-mile” infill, servicing local tenant demand. Having a warehouse that’s 30 to 40 years old is perfectly fine because your tenant base doesn’t need modern Class-A specs that do all the racking.
They don’t need the number of “trailer drops” or things like that. You really can’t build a big modern warehouse facility without having to take on huge costs.
And then when you get out to your newer product demand, somewhere like in Caledon or Oakville, that’s where we would look at more development focus in terms of newer product that we’d want to have because that’s still close enough to the population.
We really haven’t ventured out to the eastern GTA area [i.e., Pickering, Ajax, Whitby]. To be frank, we haven’t spent enough time getting comfortable there. Especially with where we’re at in the cycle in the market, it kind of feels like there’s lower-hanging fruit [elsewhere].
How comfortable are you knowing what’s happening on the ground?
I would say within those submarkets, we’re very confident. Having the Rolodex that we have, we get intros pretty quick to all the leasing and capital markets brokers. The leasing folks are the key to understanding what’s happening. A big part of Brookfield’s responsibility is understanding when there’s a lot of liquidity in the market, when there’s illiquidity, when’s the right time to put our foot on the gas, take it off, etc.
“The leasing folks are the key to understanding what’s happening”
It’s frankly no different than really any other market we operate in in North America. We have people on our team who are here [in the GTA], so having that connectivity, I think, gives us a pretty high degree of confidence that we’re in touch with the market.
Do you think industrial property is fairly priced in the GTA?
It depends on where you’re at. We believe that there is illiquidity in the higher-scale deals where there’s a discount. It’s a chicken and egg game, though, because I think other market participants know that, too.
“We compare the GTA, in terms of capitalization rates, very similarly to how we would any major institutional market in the United States”
We compare the GTA, in terms of capitalization rates, very similarly to how we would any major institutional market in the United States. So having cap rates in the low-5 area feels about where market pricing should be.
Availability has been rising in the GTA, suggesting there’s a softening of demand. Is that something you’re seeing as well?
Yeah. Part of this is a little bit of what’s happening with interest rates, particularly as you’ve seen all this new product come online. When you narrow down what happens in the logistics space, for someone to take on new space, particularly in new builds that are getting delivered, there has to be a catalyst for that.
We have seen some larger market participants and some people who have been more on the forefront of thinking about their supply chains starting to lease more space up. Frankly, it’s a little bit of a herd mentality where you start having a few of these major names [transacting], and then all of a sudden people get that fear of missing out.
With that being said, though, Toronto frankly got a little spoiled during the peak times. It was sub-1% vacancy for quite a while. That’s not really sustainable. But the nice thing about Toronto, unlike quite a few markets in the U.S., is there’s a lot of barriers to get a lot of new construction on the market.
“Toronto frankly got a little spoiled during the peak times”
Having 15m sq ft of development in Toronto – that’s a lot of development. It’s not for a lot of other markets that are of similar size, similar absorption rates, historically. When you look at that size of construction pipeline relative to the overall size of Toronto, it’s not huge.
We did an analysis that basically said if everything under construction was delivered vacant tomorrow, it’d be right around 4% vacancy for the whole [GTA] market. When you’re going from a sub-1% vacancy market and going up to 4%, yes, that might seem like a huge jump, but that’s still a very healthy market.
