Market reports for the third quarter of 2023 show that demand for industrial property such as warehouse and logistics centres is slowing, but the boost in availability is still not enough to catch up to typical vacancy rates of a few years ago.Getty Images
It’s getting easier for businesses to find industrial properties than it was two years ago, but demand is still relatively high in factory land in hot spots such as the Greater Toronto Area, Vancouver and Calgary.
If you’re a builder or owner of industrial space, the party’s not over; it’s just getting quieter. Market reports for the third quarter of 2023 show that demand for industrial property such as warehouse and logistics centres is slowing, but the boost in availability is still not enough to catch up to typical vacancy rates of a few years ago.
According to CBRE’s industrial figures report, released in early October, the national availability rate in the industrial sector rose for a fourth consecutive quarter, to 2.5 per cent in Q3. While more space is available, vacancy rates are still well below the historic level for Canadian industrial property of 4.7 per cent, the report notes.
Colliers Canada’s National Market Snapshot for Q3 paints a similar picture. “After a seemingly unstoppable years-long run of rising rents and declining vacancy, industrial availability has increased … [but] this is not to suggest the market is weak, as rents remain at record highs,” the report states.
“The industrial market has been unbelievably tight for the last few years,” says Jim Clayton, real estate professor and director of the Brookfield Centre in the Schulich School of Business at York University in Toronto. “Things are starting to change, and this is only natural because, like other markets, it goes through cycles.”
The industrial market is still tight because more companies need space to handle growing e-commerce orders and deliveries, Prof. Clayton said.
In August, Amazon Canada opened a new $131-million, 1.2-million-square-foot fulfilment centre earlier in Calgary called YYC6 Project Violin, that specializes in handling heavy and bulky orders such as barbecues, gym equipment and mattresses.
“The demand for this kind of industrial property started before COVID-19 and has continued – we all started staying home and ordering things online. A lot of the industrial space needed for this kind of an economy [was] built because existing buildings are obsolete – the ceilings are too low or the technology inside is inadequate,” Prof. Clayton says.
This has led to a market for industrial sites, which, while still tight, is changing. New buildings are being built; meanwhile, both owners and tenants are adjusting to higher borrowing costs following successive hikes in the Bank of Canada’s key lending rate since early 2022.
“I don’t think the market is going down dramatically, but it’s going to be more balanced,” Prof. Clayton says. “There is some 16 million square feet of industrial space being built in the GTA alone that will come to market soon.”
According to Colliers, the average asking net industrial property rent in Canada is $14.93 per square foot. In Toronto, it’s $18.57, and in Vancouver, it’s a whopping $21.84, but with a slivery vacancy rate of only 1.2 per cent. Meanwhile, in Calgary, industrial vacancies are also tight, at 2 per cent, but average rents are only $11.89 per square foot.
“A lot of companies that have outgrown space in Vancouver and are in need of more are moving to Calgary,” says Russell Wills, Colliers Canada’s industrial research lead.
“Some of it is because of demand for space in the energy sector, but there’s a lot of new activity in other sectors. The Amazon facility is an example,” he says.
“There’s a lot of other new industrial building going on in Calgary, too – warehouses, third-party logistics facilities, places suitable for e-commerce,” Mr. Wills adds.
Calgary has also offered incentives for converting office space to housing, which aimed to provide as many as 2,300 homes and ease an office vacancy rate of 26.7 per cent in Q3. The program has recently been paused by the city to make adjustments to details and secure more funding.
The market for subletting industrial properties is also hot right now, Mr. Wills says.
“A lot of companies leased space at the end of the pandemic and are adjusting to smaller spaces by subletting, as they figure out what their businesses actually need,” he says.
Industrial developer David Owen says his firm is a seeing large demand for infill warehouse space – properties developed on unused or underutilized sites close to existing roads, transit, sewers and other infrastructure services.
“We expect this demand to continue to grow, given the lack of new supply of this type of asset,” says Mr. Owen, president and chief operating officer of Pure Industrial, a Toronto-headquartered company that owns, leases and manages warehouse properties across the country.
While there are new industrial projects coming on stream, the pace of industrial construction is slowing, he says.
“New construction starts were down nearly 80 per cent in the third quarter compared with the same period last year, and the supply that is getting built primarily consists of large bay facilities in suburban locations, catering to big-box distributors,” he says.
Not everyone wants or needs a giant logistics centre though, Mr. Wills adds: “Our customers want to be located close to their labour and customers to maximize the efficiency of their businesses. This is typically done in more infill nodes, where dense populations exist and where there’s public transit.”
The current industrial property market “should be viewed more as a cooling of a sector that was essentially overheated for over two years,” says Cushman & Wakefield’s Canada Industrial Outlook for Q3 2023.
“The construction side of the equation will likely continue to be a key factor that drives vacancy rates as well as absorption totals in the coming quarters,” the outlook report says.
Prof. Clayton agrees that the market is in transition.
Lots of industrial buildings may be going up now, but higher interest rates are affecting plans for new development and leasing, he says.
“Supply still can’t keep up with demand, but at the same time, everything is getting repriced right now,” Prof. Clayton says.