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Rents for industrial space continue to rise as demand outpaces supply

Monday, May 14, 2018

Insatiable demand for industrial space in Canada continues to outpace supply and drive rents higher.

A new report from Avison Young has revealed a record-low national industrial vacancy rate of 3.3 per cent in the first quarter of 2018 – down 40 basis points (bps) year-over-year.

“Canada’s industrial market is performing well beyond expectations, and although absorption levels vary from city to city, the industrial market’s increasingly strong link to the retail sector, specifically e-commerce, remains a key catalyst for growth,” says Bill Argeropoulos, Principal and Practice Leader, Research (Canada) for Avison Young. “As a result, large-format distribution/fulfilment centre space is desirable, but scarce. Meanwhile, the overall industrial sector remains challenged by rising land costs, including soaring development charges, and dwindling supply of developable land in some markets.”

Among larger markets in North America, Toronto (1.7%) and Vancouver (1.8%) boasted the lowest vacancy rates; Vancouver and Regina claimed two of the 10 highest average asking net rental rates, with Ottawa falling just short of the top 10.

Ten of 11 Canadian markets displayed single-digit vacancy rates with four markets posting rates below the national average. Vacancy declined in eight of 11 markets year-over-year, while Halifax recorded the greatest annual change (-180 bps).

“The sector’s encroachment on urban centres – to shorten last-mile delivery – and associated high costs may prompt landlords in Canada to follow the trend seen elsewhere and build multi-storey facilities that better fit into tighter infill markets,” Argeropoulos added. “Innovative developers will ultimately transform the supply chain by thinking outside of the traditional warehouse box as stakeholders aim to future-proof their assets.”

With developers trying to stay ahead of demand, the amount of space under construction almost doubled year-over-year to 16.2 msf (53% preleased) – equating to only 0.8% of the existing inventory. Through the first quarter of 2018, Toronto led Vancouver by a slim margin and, together, these markets accounted for more than half of the total industrial area under construction across Canada.

Rents are on the rise, pushing asset values higher. Canada’s average industrial net asking rental rate increased $0.25 per square foot (psf) year-over-year to finish the opening quarter of 2018 at $8.30 psf. Annually, rents grew in eight of 11 markets, with five markets recording rents greater than the national average. Rents were highest in Vancouver ($10.91 psf) in the West and Ottawa ($10.10 psf) in the East, while Western markets maintained a healthy $2-psf-plus spread above Eastern markets.

Argeropoulos said: “The U.S. administration’s desire to revamp NAFTA and introduce
protectionist trade policies has the potential to create headwinds for Canada’s industrial market and the economy in general. For now, the industrial market is expected to operate at or near capacity until new supply catches up with demand.”

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