Canada’s national industrial vacancy rate is loosening, but remains 100 basis points (bps) lower than the five-year average prior to the 2020 onset of the COVID-19 pandemic. Cushman & Wakefield’s newly released overview of the fourth quarter of 2023 pegs the overall vacancy rate at 2.7 per cent across 13 regional markets with the average net rent at $16.80 per square foot (psf).
Last year brought 9.5 million square feet of positive absorption alongside the delivery of 34.4 million square feet of newly constructed space. Even so, Q4 was the first quarter to serve up national negative absorption in more than 10 years. That 760,000-square-foot surfeit is mostly related to nearly 2 million square feet emptying out in Montreal, but smaller amounts also occurred in Toronto, Waterloo Region and Ottawa, while Vancouver, Calgary, Saskatoon and Atlantic Canada continued to see positive absorption.
As well, Toronto was the only market to realize a quarter-over-quarter increase in net asking rents, as the national average slipped compared to the previous quarter for the first time since Q1 2016. Vancouver continues to command Canada’s highest rents, with the average net at $20.65 psf, followed by Toronto at $18.43 psf. For Q4, average net rents are pegged at $15.16 psf in Montreal, $14.49 in Waterloo Region, $14.07 psf in Ottawa and $10.92 psf in Calgary.
The industrial supply influx underpins the steep drop-off in absorption, which surpassed 20 million square feet in each of the preceding four years — topping out at 28.5 million square feet in 2021 then slightly lower at 27.8 million square feet in 2022. As of year-end 2023, about 48 million square feet were vacant in an inventory of nearly 1.76 billion square feet of industrial space.
Cushman & Wakefield’s senior manager of research, Kristina Bowman, notes that Toronto has been the “epicentre of new industrial construction in Canada since 2020” — adding 49 million square feet, equivalent to nearly 6 per cent of its total inventory, in that period. More than 16.6 million square feet is still under construction, coming into a market where the vacancy rate currently stands at 2.6 per cent.
Although St. John’s is an outlier with a vacancy rate of 11.4 per cent as of Q4, elsewhere rates range from a low of 1.2 per cent in Waterloo Region to a high of 5.3 per cent in Halifax. Among larger markets, the vacancy rate is 3.4 per cent in Montreal, 2.2 per cent in Vancouver and 3.7 per cent in Calgary. Montreal was alone in registering negative absorption in 2023 — approximately 2.1 million square feet in a year when about 2.6 million square feet of new industrial space was delivered.
Across Canada, nearly 41 million square feet of new product is currently under construction, of which more than 14 million square feet is expected to come onto the market in the first quarter and a further 21 million square feet should arrive before the end of 2024. About 8 million square feet of new supply is set for Vancouver, 6.7 million square feet in Calgary, 3.6 million square feet in Waterloo Region and 2.9 million square feet in Montreal.
“Similar to this year the delivery of this new supply will in no doubt impact vacancy and absorption levels, particularly as the overwhelming majority of these projects are being built on a speculative basis,” Bowman observes. “A key influence on rates looking to 2024 will be the amount of vacant space that arrives in these new builds and the pricing attached to it.”
She also suggests sublet space bears watching as a percentage of total vacant space that has grown from 10.8 per cent to 15 per cent over the past four quarters. “The driving factors behind this sublet vacancy increase can be traced back to tenants who may be re-evaluating their space requirements in the current environment due to slowing demand for goods in combination with higher occupancy and/or financing costs,” Bowman hypothesizes.