Article
Where are Industrial Rents Headed? Panattoni’s Wade Dobbin Looks Ahead
April 8, 2022 3 Minute Read
Canadians became experts at online shopping during repeated lockdowns. From groceries to clothing to household goods, ecommerce penetration nearly doubled between 2019 and 2022, according to CBRE’s 2022 Canada Real Estate Market Outlook.
However, the swift adoption of ecommerce coincided with global supply chain disruptions. To mitigate any future chaos, companies began to carry more safety stock. This shift from a “just in time” model to a “just in case” framework has spurred a rush in leasing activity for distribution and logistics space.
In the quest for supply chain optimization – having the right goods available, at the right time, in the right numbers – major markets like Toronto and Vancouver have effectively run out of industrial space.
With demand showing no signs of slowing and preleasing activity escalating, tenants have been left to wonder, where are rental rates heading?
Rising rates
Wade Dobbin, a partner with Panattoni Development Co., told CBRE’s Market Outlook that it’s “hard not to imagine” that rents will continue to rise over the next several years as land prices and construction costs climb. Specifically, Dobbin forecasts that rental rates will be 20% higher in two years and a minimum of 35% higher five years from now.
As of Q1 2022, industrial net rents sit at $11.20 per square foot, nationally. They have risen every quarter since Q3 2020.
Construction activity has reached record highs as developers race to meet the demand. More than 41 million square feet of industrial space is currently under construction across Canada but, with fierce competition, nearly 70% of that space is already spoken for.
Dobbin believes it will take three to six years of developers putting the “pedal to the metal” for the national availability rate to reach even 2% or 3%.
“I would build as much as I could right now, as would all of my competitors,” he says, adding that permits are increasingly hard to get approved. “All of our buildings are leasing up before they’re finished, as are everybody else’s. I don’t see this stopping.”
Companies will tolerate higher rents if it helps them cut down on transportation costs. The former makes up roughly 5% of logistics costs, while the latter accounts for up to 70%.
Being able to get goods to consumers faster, and bypass any supply chain chokeholds, is worth an increase in fixed facility costs, says CBRE Vice Chairman Paul Morassutti.
With land prices creeping higher, too, the “next big thing” in the industrial market could be multi-storey space, Dobbin says. Another emerging trend, likewise spurred by rising land prices, is the conversion of office complexes into industrial warehouses.
“The most important thing for users right now is timing – ‘How quickly can I get into the build?’” Dobbin says. “The price and the physical characteristics of a space are secondary to that.”
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