As industrial vacancy rates continue to plummet in Canada’s six largest cities, the need for more facilities is becoming more acute, according to a new Colliers International report.

Colliers’ Canadian market intelligence director Craig Hennigar (Image courtesy of Colliers Canada.)

Overall occupancy grew by an annualized 1.59 per cent in the third quarter and by 1.74 per cent during the year to date. This equates to just more than 6.7 million square feet of absorption in the quarter and 14.5 million square feet for the year.

New construction hasn’t kept pace, with only 4.3 million square feet of new premises completed in the quarter, and 8.8 million square feet completed so far this year.

At the current pace, the six Canadian markets have just a 21-month supply of vacant space, which grows to only 31 months when all the properties under construction are included.

Colliers’ Canadian market intelligence director Craig Hennigar, with assistance from market intelligence researchers, analyzed each of the markets and shared his observations from the report with RENX.

Greater Toronto Area

Industrial space availability in the Greater Toronto Area (GTA) fell to a historic low of 1.4 per cent in the third quarter, and it now has approximately 3.2 years of supply based on the current vacancy and premises under construction.

“Total construction makes up less than one per cent of overall existing inventory, and new supply has declined sharply over the previous decade,” said Hennigar. “Most developments have the majority of their space leased by the time they come to the market.”

Almost all of the new supply of 277,307 square feet was delivered in Mississauga.

Strong tenant demand has pushed rental rates in the GTA up 10 per cent year-over-year, from $6.23 to $6.85 per square foot. Such growth is unprecedented in recent years.

GTA East recorded the highest rental growth of 20.9 per cent year-over-year, as average asking net rents increased from $5.12 to $6.19 per square foot.

“The GTA industrial market has a record low vacancy rate,” said Hennigar. “Meanwhile, factors such as increases in land prices, construction costs and diminishing new supply in recent years has resulted in a lack of available options for tenants and is, hence, favourable for landlords.”

Montreal

Montreal’s industrial vacancy rate decreased from three per cent in the first quarter to 2.7 per cent in the third quarter, when it posted 1.4 million square feet of absorption. The city has approximately 3.3 years of supply of industrial space based on the current vacancy and premises under construction.

“The shortage of vacant land on the Island of Montreal is hastening the exodus of companies seeking bigger spaces at a reasonable price,” said Hennigar. “Data centres, cryptocurrencies and cannabis growers, as well other emerging activity sectors, could trigger new demand for industrial space.”

Vancouver

The Metro Vancouver industrial market continues to experience vacancy rates well below the five‐year average of 2.6 per cent. There are approximately 20 months of industrial supply based on the current vacancy and premises under construction.

There is 3.1 million square feet of space in Metro Vancouver being built on spec, and 11.49 million square feet either under construction or planned without lease commitments.

“Recent development activity has been from developers who largely have already purchased the land and are building the development out,” said Hennigar. “Many of these developments are being absorbed quicker than has ever been seen before.

“Current projects are on Tsawwassen First Nation lands near Deltaport, Onni’s Golden Ears Business Park and Oxford’s Riverbend Business Park.”

Notable large-scale projects at which construction was completed during the third quarter include:

– Delta iPort’s Building 1, with 454,000 square feet fully leased by Amazon as a fulfillment centre;
– Campbell Heights West Business Park’s Building 200, with 202,105 square feet;
– and Delta Link Business Centre Phase II, with 133,765 square feet.

“Supply of industrial land is dwindling, especially larger parcels that are required for distribution centres, so space of this scale is becoming scarce,” said Hennigar.

Calgary

Calgary’s industrial vacancy rate fell to 4.7 per cent, its eighth consecutive quarterly drop. While there was limited new supply in the third quarter, significant inventory is anticipated to reach completion in the fourth quarter or early 2019, which might result in an increase in vacancy.

Calgary has approximately 2.6 years of supply of industrial space, based on the current vacancy and premises under construction.

There’s strong demand for large bay spaces of 40,000 square feet or more, with numerous tenants in the market looking to transact on buildings currently under construction.

Calgary is a distribution and logistics hub for Western Canada, and companies in that sector are keen on real estate in the northeastern part of the city around the airport.

“This has been one of the most significant drivers for decreasing vacancy and the continued strong positive net absorption,” said Hennigar. “Many large companies have taken advantage of this and have set up shop in Calgary, like Amazon and Kuehne + Nagel.

“We are currently working with a handful of other large distribution-related companies who are looking at occupying space throughout the city, as well as in the Balzac area.”

Edmonton

Edmonton had an annualized growth in industrial occupancy of 5.42 per cent and almost two million square feet of absorption in the third quarter. Its year-to-date absorption is almost 3.2 million square feet.

Despite the absorption, the vacancy rate remained essentially unchanged as new supply was almost equal to absorption. Edmonton had the highest vacancy rate of the six cities in the report at 6.4 per cent.

The Leduc/Nisku area saw a substantial amount of new space added, as a number of large projects wrapped up construction. These included the 800,000-square-foot Aurora Cannabis facility and the new 400,000-square-foot Ford distribution space.

Edmonton has approximately 2.4 years of supply of industrial space based on the current vacancy and premises under construction.

Ottawa

Ottawa’s vacancy dropped to 1.8 per cent in the third quarter and, with little new construction, there’s a looming shortage of industrial space. The annualized year-to-date occupancy growth has been 1.8 per cent in 2018. There are only 18 months of supply remaining before Ottawa runs out of space.

A lack of availability of space more than 45,000 square feet makes it increasingly difficult for larger users which are looking in Ottawa.

Amazon’s announcement to create a one million-square-foot facility on Boundary Road might influence the future of Ottawa’s South and Orleans markets. Orleans, however, already has an availability rate of just 0.2 per cent and, in recent quarters, has seen more retail developments take shape than industrial.

The solution — constructing more buildings — might not be so easy either, the report says. The availability of serviced industrial-zoned parcels of land in desirable locations continues to pose a challenge for the National Capital Region.

“Developers are looking more toward the Greater Ottawa Area, including lands that we do not track as part of our stats,” said Hennigar.