Rendering of the new Delta iPort distribution centre under development in British Columbia. One of the two large industrial facilities is fully leased, the other half leased. (Image courtesy GWL Realty Advisors)

The supply of industrial properties still isn’t keeping up with demand despite 26.9 million square feet being under construction in the first quarter of 2019 — up from 16 million square feet a year earlier.

“Tenants, particularly those linked to e-commerce logistics and distribution, have turned out to have such a voracious appetite for space that the development community is struggling to keep up,” said Bill Argeropoulos, principal and practice leader for research in Canada for Avison Young, which just released its Spring 2019 Global Industrial Market Report.

“In turn, this phenomenon has put upward pressure on all kinds of costs — occupancy costs, land costs, construction labour and materials costs, and development charges. Steel tariffs linked to the ongoing North American free trade discussions have also increased the cost of industrial construction.”

Low industrial vacancy rates

There’s approximately two billion square feet of industrial space inventory in Canada, and the national vacancy rate at the end of the first quarter of 2019 was three per cent, down 70 basis points from a year earlier.

Three Canadian cities had the lowest industrial vacancy rates in North America in the first quarter, with Vancouver at 1.2 per cent, Toronto at 1.5 per cent and Ottawa at 1.6 per cent. Halifax had the highest vacancy rate in Canada at 8.7 per cent, but even there vacancy was down 420 basis points year-over-year.

New industrial supply deliveries doubled to 16 million square feet on a year-over-year basis, led by Toronto with 5.5 million square feet, Calgary with 3.6 million square feet and Vancouver with 3.5 million square feet.

There’s 12.2 million square feet of industrial space under construction in Toronto, 5.2 million in Vancouver and three million in Montreal.

Speculative industrial construction

Twenty-eight of the 43 buildings underway in the Greater Toronto Area, representing 45 per cent of total square footage, are speculative in nature, according to Argeropoulos. Developer confidence in ongoing tenant demand is reflected by some large speculative projects.

One Properties’ 823,514-square-foot 400 Industrial Centre property at 2233 Sheppard Ave. W. in Toronto started on spec but is now fully leased.

Healthcare of Ontario Pension Plan (HOOPP) and Triovest’s 800,000-square-foot iPort Caledon property at 12000-12400 Coleraine Dr. in Bolton is still awaiting a tenant, according to Argeropoulos.

There are also sizeable speculative developments underway in other major markets, including Calgary (with two large projects by Hopewell Development) and Vancouver (HOOPP and GWL Realty Advisors’ Delta iPort distribution centre).

Bill Argeropoulos, Avison Young’s principal and practice leader for research in Canada. (Courtesy AY)

Industrial absorption and pre-leasing

Twelve-month absorption totalled more than 27 million square feet, which was up from almost 20 million square feet in the previous 12-month period. Toronto accounted for 52 per cent of the absorption total, while strong year-over-year gains were posted by Vancouver, Calgary and Montreal.

“When you look at how much space is being absorbed, there is a very strong likelihood that we will continue to play catch-up,” Argeropoulos told RENX.

Sixty-six per cent of the industrial area under construction is already pre-leased.

“Industrial buildings have a short development cycle and it would even be reasonable to expect most of these buildings to have secured tenants by the time they are completed,” said Argeropoulos.

“Even in the country’s three largest industrial markets (Toronto, Montreal and Vancouver), which are also the most active development markets, there is no sign of weakness as the collective pre-leased rate is north of 70 per cent.”

Increasing industrial rents and sale prices

Average net asking rents in the 11 markets included in the report were $8.66 per square foot at the end of the first quarter. At $11.49 per square foot, Vancouver had the highest rents.

Average sale prices were $154 per square foot nationally, up $20 from a year earlier. Vancouver’s prices rose 37 per cent to $387 per square foot, while Calgary (up 32 per cent to $209 per square foot) was the only other Canadian market to breach the $200 mark.

“I would expect both rental rates and sale prices to continue increasing through the rest of 2019 and beyond, until the supply-demand imbalance in the market is resolved,” said Argeropoulos.

“Shortage of supply means that rates have been increasing not only for newly built industrial product, but also for existing assets that would have been considered obsolete not too long ago.

“The value of these assets, both in terms of rent and sale prices, has also increased, given the opportunities they present for redevelopment and/or repurposing.”

Industrial property investment

There was $7.8 billion of investment in the Canadian industrial property sector during the 12 months ending on March 31, a seven per cent year-over-year increase. Nearly two-thirds of that total was directed to Toronto and Vancouver.

While restricted supply poses challenges for occupiers and investors, Argeropoulos expects industrial to remain the “darling” asset class among buyers in 2019.

“With such strong industrial leasing fundamentals and a landlord-favouring market, investors’ eagerness is likely to persist. The fact that capitalization rates were down or flat in all markets but one is further evidence of continued investor demand.”

Similarities with other countries

In all seven countries surveyed for the Avison Young report, strong demand from e-commerce warehousing, logistics and distribution tenants is driving the performance of the leasing and investment markets. The need to be close to urban centres for last-mile delivery of consumer goods is prevalent all over the world.

One area where Argeropoulos said other countries are ahead of Canada is with respect to multi-storey industrial facilities. They’ve already been built in some British and American cities where land is at a premium.

Such buildings may be the next logical step to make the most of opportunities in Canadian cities with restricted urban sites and constricted land supplies.

“Vancouver seems to be leading the charge, as PC Urban confirmed that it will proceed with a planned stacked, multi-storey development,” said Argeropoulos.

“Other developers such as Conwest Group, Wesgroup Properties, Oxford Properties and Hungerford Properties are also exploring the feasibility of multi-storey industrial buildings in Vancouver’s core industrial sub-markets.”