CBRE made headlines earlier this year when we forecast that Canada’s major markets could run out of quality logistics and distribution space by year’s end.
“I actually thought the prediction was a bit bold,” says CBRE’s Vancouver-based industrial broker Chris MacCauley. “But it ended up proving to be an understatement.”
Nowhere more so than in Vancouver, where the industrial availability rate in the third quarter dropped to 0.9%, the lowest it’s ever been. “It certainly shows the strength of our market,” says MacCauley. “If you were a business that needed to occupy more than 100,000 sq. ft., you’d have just one option at the moment, which is remarkable in a gateway market with 200 million sq. ft. of industrial space. But that’s where we find ourselves: an economy poised for growth after the pandemic with no room to grow.”
Metro Vancouver has 6.3 million sq. ft. of new industrial development currently under construction, but nearly 70% of that space is already pre-leased or under contract. “And we predict that number to be 90% pre-leased prior to construction completion,” MacCauley says. “Very little of that will make its way into available inventory.”
It’s the same situation in Toronto, where industrial availability also dropped to 0.9% in the third quarter. While there is 9.4 million sq. ft. of new industrial space being built, CBRE Vice Chairman Kyle Hanna says that 90% of the product delivered in 2021 is pre-leased. “And it’s been like that since midway through the year. We’re completely bottle-necked.”
A lack of supply is being exacerbated by municipal delays and construction material shortages. “All that coupled with the aggressive pre-leasing has created huge challenges in delivering inventory for 2022,” says Hanna.
The product that is coming online in 2022 is already close to 40% pre-leased, and Hanna sees it reaching 90% by the second quarter of next year, a quarter ahead of when it hit that same mark in 2021. “Not only is demand accelerating but it’s happening faster than we can get buildings built. And that’s continuing to push rental rates higher.”
Toronto’s industrial average net rents in Q3 rose to $11.63 per sq. ft. , up from $9.76 per sq. ft. a year earlier. Vancouver’s average net rents hit $15.37 per sq. ft. in Q3, up from $13.92 per sq. ft. a year earlier. In Montreal, where industrial availability fell to 1.2%, rents are lower than in Toronto and Vancouver, but they’re rising just as quickly, hitting $8.81 per sq. ft. in Q3 versus $7.19 per sq. ft. a year ago.
Montreal’s industrial supply situation is almost as dire as Toronto and Vancouver’s. E-commerce, third party logistics, and food and beverage tenants drove 1.2 million sq. ft. of absorption there in the third quarter alone. And though a record-high 4.59 million sq. ft. of product is under construction across the Greater Montreal Area, 65.0% of it is pre-leased., providing minimal supply relief.
“What’s coming online is just a drop in the bucket in a market of 350 million sq. ft.,” says CBRE’s Montreal-based industrial broker James Cacchione. “Any new supply, whether it’s existing inventory or new product, will be gobbled up by the top-tier e-commerce and logistics companies.”
It’s created a heated environment for seekers of industrial space. “Those on the tenant or purchaser side are constantly in competition,” Cacchione adds, “so they really have to put their best foot forward. Their first offer must be better than asking, to make it easy for a landlord to pick you over the competition. Offers are getting leaner and leaner in terms of conditions. Purchasers and tenants are trying to omit as many conditions as possible right out of the gate.”
Having been somewhat overlooked by investors for years, Montreal is now finding itself in the same league as the Toronto and Vancouver industrial powerhouses. Which would help explain why Montreal has been seeing some of the fastest industrial rental rate growth of all Canadian markets. “It’s a good thing,” Cacchione says. “Because we have a lot of catching up to do.”
Is there a fix?
With Toronto's industrial availability hovering around 1.0% for several years now, the only option for space-seekers with larger requirements has been to look farther afield — much farther.
“If you want to have access to the GTA you have to look everywhere from Durham Region, to Hamilton, across to the Cambridge-Kitchener area, and up the 400 and 404 highways into Aurora and Bradford,” says Hanna. “There is no relief valve in the core GTA sub-markets, it’s a land-constrained market. So both occupiers and developers, even large institutional capital, are being pushed beyond the traditional primary industrial markets.”
He anticipates more large-scale redevelopments of older GTA manufacturing sites in a bid to create new supply. “With land values so high, we’ll be seeing a lot more repurposing of assets.” In Meadowvale, near Mississauga, CBRE is working with Carterra on the redevelopment of an office building into industrial space. “Conversions and redevelopment, that’s the only real solution for those looking to be in the core GTA.”
Montreal is ripe for industrial makeovers. “We have no shortage of decrepit industrial space here,” says Cacchione. “The older industrial parks are ripe for redevelopment. At some point, it will be the only way to meet business needs, but it won’t provide any relief for the foreseeable future."
MacCauley in Vancouver says that it doesn’t improve the tight supply situation when the largest industrial users in the world pounce on every large-bay logistics opportunity that comes available, with seemingly no regard for lease rates. “They have the flexibility and margins to swing the bat. They want the space and chances are they are going to get it.”
Oxford created buzz in 2019 when it unveiled its plans for a multi-storey industrial development in Burnaby, the first of its kind in Canada. But MacCauley doesn’t see multi-storey industrial projects becoming common. “The cost of construction hasn’t made them viable yet, and then there’s the cost of the underlying land. Multi-storey could help in a minor way but it’s not going to be the solution to our sub 1% vacancy.”
“We’re a physically constrained market and that’s not going to change,” he adds. “So I see us continuing to be a tight market to get into, and those looking for industrial space will have to look at locations outside Vancouver, but it’s getting pretty tight across the board.”
CBRE predicted Canada’s major industrial markets would run out of space before year’s end, and it’s come to pass. With market fundamentals unlikely to change in the near future, it’s critical for those seeking space to anticipate their business needs now and move more swiftly than ever in executing on an industrial real estate strategy.