I wrote this for a client who wanted to understand cap rates for industrial units in Toronto. After emailing him back, I thought I will share this will all of you.
I am often asked how can I get the best cap rate in today’s market. When I answer my clients and tell them industrial units they are surprised. So let me break down the numbers.
5% Cap Rate In Industrial Units
Cap rates of 5% or more in today’s market is a hard find if, at all. Perhaps office buildings it was very feasible, however after the pandemic the office buildings have dropped down by 1 basis points.
In the future, we expect there to be less demand for office units as more companies work from home long term.
While a cap rate of 5% in the industrial market is possible because it is in high demand.
High Demand, Low Supply For Industrial Units
Industrial units are becoming a hot commodity, which will result in lower vacancy rates and higher rents year on year. This pushes up the cap rate.
As more shoppers buy online, there is a demand for industrial units close to large cities. Companies need the space for storage and distribution.
This is all while the vacancy rate for industrial units in the greater Toronto area is at an all time low of 0.5%.
This all combines to increase rents and the value of your asset/
Case Study: 5250 Solar Drive
This project has grown over 15% in value every year since 2018. While the industrial market is predicted to continue to grow over the next five years.
Their purchase price is lower than the old resale stock price. Their purchase price is at $320/sqf, or even if you add the closing costs it comes out $343/sqf.
The lease rate at the low-end $15/sqf, and allowing room for costs, will give a cap rate of 4.3%.
Cap rate for old units vs new units.
Cap rate for new properties vs old properties will always be different. If all else being the same (location, size, property type etc), a new property cap rate will always be lower than an older building.
This is simply because new building will last longer as opposed to older 30-40+ year buildings and maintenance/headaches are much lower.
