CIBCEQUITY RESEARCH June 29, 2023 Company Update
DREAM INDUSTRIAL REIT
Property Tour: Seeing The ‘Great’ In Greater Toronto
Our Conclusion
This week we had the opportunity to tour several of Dream Industrial’s GTA
properties, along with properties from the newly formed Dream Summit JV.
Sub-1% vacancy in most regions and little supply are continuing to drive
rents up. Renewals continue to achieve large spreads, yet rent remains a
lower proportion of costs for tenants. DIR is in the second phase of the
Summit JV integration where the focus is on leveraging the national platform
for multi-located tenants to provide them with consistent service levels.
The tour highlighted the strength in the GTA and we foresee potential for
continued strong organic growth as leases with low in-place rent mature. We
maintain our Outperformer rating and $18 price target.
Key Points
Lack Of Alternatives A Good Thing: Tenants are well aware of market
conditions and have been willing to pay market rents (plus ~4%-5% rent
escalators) given a lack of alternatives and moving costs. Several assets
toured had been renewed at almost double the expiring rents. Management
noted that most tenants are engaging in expansions, rather than shrinking.
Demand is broad-based and GTA properties are occupied by tenants from
wide-ranging industries, including: food and beverages, medical and auto
suppliers, home furnishings, construction, and logistics.
Solid Market Fundamentals: YTD GTA market rents have increased by
~5%-7% while DIR is averaging close to 10% (and seeing similar lifts in
Montreal and Calgary). Colliers forecasts 4% growth in 2023 and 5% in 2024
but noted the forecast could prove conservative. Speculative supply in the
GTA has declined by >30% since Q1/23. While the accelerated rent growth
observed in the last few years is unlikely to continue at the same pace, the
GTA market is on solid footing, which we compare in the bar chart in
Exhibit 1. Further, the relatively long average lease terms in the Summit
portfolio present embedded upside on renewals.
Tight Conditions Benefitting Adjacent Markets: Management noted an
increase in interest in regions outside the central GTA as rents continue to
climb. The Guelph, Burlington and Durham regions offer relatively lower rents
(though they have started to converge with the central GTA) while still being
well located with good highway access and in short proximity to the core
GTA. Transit and labor pool accessibility are key factors driving companies’
decision-making. Land pricing in Caledon is now outpacing Mississauga and
Brampton and the region is experiencing strong development activity.
Impact Of Rising Construction Costs: Higher interest rates have added
~$15-$20/sq. ft. in construction costs, pushing up required rents. In
particular, sites owned by merchant developers are on pause, which is
creating a supply vacuum for 2024 and 2025 deliveries