Canada’s Industrial Availability Rate Drops Below 4% for the First Time as Demand from All Industry Sectors Increases

Limited industrial availability and record rental rates are contributing to a new wave of construction

Industrial availability continues to fall in Canada, buoyed by e-commerce, distribution & logistics and warehousing demand. The combination of falling availability and rising rents is causing developers to accelerate construction to deliver new space in supply-starved cities such as Toronto, Vancouver and Montreal. According to CBRE's Canada Q2 2018 Quarterly Statistics Report, the overall Canadian industrial availability rate fell 10 basis points ('bps') to a record 3.9% in Q2 2018, with availability tightening in eight of the 10 major commercial real estate ('CRE') markets.

This past quarter, the Canadian industrial market saw over 6.6 million sq. ft. of positive net absorption, the commercial real estate industry's measure of tenant demand, an increase of 29.4% quarter-over-quarter, and far outpacing the 3.9 million sq. ft. of new supply. As a result, Q2 saw a sharp uptick in rents, with net asking rent increasing by 6.3% year-over-year to $7.21 per sq. ft., the highest on record. To alleviate the supply crunch, construction activity has ramped up by 47.1% quarter-over-quarter to 19.4 million sq. ft.

"As we carefully consider the ramifications of trade uncertainties between Canada and its closest trade partners, the heightened activity from all industry sectors is encouraging, with distribution, food and e-commerce leading the pack. As last mile delivery becomes increasingly important, tenants from these sectors are expressing interest to be closer to major Canadian urban centres in Toronto, Vancouver and Montreal. However, with limited product available, many users are reverting to suburban options," commented Werner Dietl, EVP and GTA Regional Managing Director at CBRE Canada.

Toronto remains the tightest industrial market in North America at 2.2% availability, the lowest on record, followed by Vancouver at 2.4%. Tightening availability in both markets has emboldened landlords to increase average net asking rents. Toronto experienced 8.3% year-over-year rental rate increase to $6.55 per sq. ft. Rents increased much more dramatically in Vancouver where they went up by 26.1% year-over-year to $11.59. These rental rates are the highest on record for both cities.

Montreal, Canada's second largest industrial market, continued to see a decline in availability, dropping 30 bps to 5.3%, the lowest it has been since Q2 2002, with absorption outpacing new supply by almost six times. "Availability in Canada's major industrial markets continue to plummet, which is putting pressure on tenants. However, it's important to remember there is still 70.6 million sq. ft. of available industrial space in Canada. While tenants still have options, the game has changed and it is important to identify a property's potential and be able to make an offer quickly. Like the residential real estate market, it is common for all types of industrial properties, regardless of clear height, to have multiple purchase or lease offers on the table. Tenants, big and small, need to be nimble, strategic and be ready to jump on opportunities that suit their needs," said Dietl.