The Greater Toronto Area industrial real estate market is among the four largest in North America and it has the lowest vacancy rate of any major American or Canadian market.

So even while the availability rate has risen to 3.1 per cent from sub-one per cent earlier this decade, the large amount of space that’s been delivered recently was expected and population growth should continue to drive demand for more of it.

“There's absolutely zero panic,” Avison Young sales representative and principal Ben Sykes told RENX. He said that although rising interest rates put a hold on decision-making last year for many companies, a return of stability in those rates means more activity is starting to be seen in 2024.

“I think we're going to see, as a result of that, some positive absorption over the next couple of quarters.”

12.4 million sq. ft. under construction

After a record 5.4 million square feet of industrial space was delivered in the GTA in Q1 2024, 12.4 million square feet remains under construction. That’s in line with the past three years, according to Colliers' national industrial research lead Russell Wills.

“A couple of years ago when you started construction there was the probability that you would be leased at completion of construction,” Colliers' GTA industrial senior managing director Tracy Macdonald told RENX. 

“You were receiving offers pre-construction, for sure. We're now seeing opportunities with newly constructed space that doesn't have a lot of activity on it.” 

There are fewer small- and mid-bay industrial assets in the pipeline to supplement the current supply, though there’s still plenty of demand from users, so that segment should continue performing very well.

Rent growth has slowed

The explosive rent increases of recent years have flattened, but that growth — along with the one per cent vacancy rate at the height of the COVID-19 pandemic — was never expected to be sustainable for the long term. 

Newly constructed class-A space is being offered in the $19- to $20-per-square-foot range, with some buildings getting up to $21.

“Because the vacancy rate was so low, we just used a $20 brush over everything,” Macdonald observed. “Whether it was second-, third-, fourth- or fifth-generation, it was all $20.

“Now we are seeing a little separation between class, product, clear height, et cetera. So some transactions we're seeing $16, $17 and $18. Not everything is at a $20 rate.”

More flexibility and inducements

While landlords want to keep face rents in place rather than lowering them to attract occupiers, tenants are starting to see breaks that weren’t on the table two years ago.

Inducements, including free rent packages and money being made available to fit out space, could be offered more often by landlords to attract tenants this year as the market tilts toward balance.

“There's more flexibility to have some meaningful discussions about what the future looks like for your tenancy and staying within an existing building,” said Macdonald. 

“Landlords obviously recognize that tenants can move now and there are options out there, so they need to treat the situation a little bit more favourably and have those open dialogues.”

Sykes said more space being available means tenants no longer face as much pressure to make quick decisions, and that will enable them to “scale, consolidate and drive efficiencies.”

Sublet activity and demising of buildings

Sublet activity crept up marginally from Q4 2023 to Q1 2024 and Wills said it’s now stabilized at approximately three million square feet across the GTA.

Landlords are also now more willing to demise large buildings into smaller spaces for multiple tenants than they were at the height of the market and are incurring the costs to do it.

“Every landlord that goes into a development project will certainly risk-proof the asset and not just look for one tenant for the building,” said Macdonald. “They'll probably underwrite it for either two or three tenants.

“Depending on the asset, coming out of the gate with a new build you usually are out in the market saying, 'We only want to lease it to one user.' And then your fallback position is if you have a little block of space that you're demising it.”

Fewer new projects being launched

Construction financing challenges and development yield requirements are causing a slowdown in the industrial space delivery pipeline because projects are becoming more difficult to pencil out for developers looking to make healthy margins.

Macdonald has heard of a couple of projects being paused because they were underwritten at the height of the boom with rent projections of $24-per-square-foot that aren’t currently feasible.

“I think in 2026 and ’27 we're going to be back in a spot where the market could very well be undersupplied," Sykes said.

"We could be in that same sort of cycle where rents are escalating very quickly because we're going to drop below a two or even a one-and-a-half per cent vacancy rate again because developers are taking a cautious wait-and-see approach."

Sykes expects tenants to continue consolidating operations and moving from multiple older and smaller buildings into newly built and more efficient larger ones -- especially because rents in B- and C-class buildings often aren’t far behind those in A-class facilities.

“Why not be in a brand new state-of-the-art facility offering double the amount of cubic capacity at only a slight per-square-foot premium?”

Buyers remain interested

While the high sales transaction activity that took place in the low interest rate environments of 2021 and 2022 will be difficult to replicate, there is still an active buyer pool as industrial remains a very attractive asset class.

“Because of that continued rent growth that we saw over even the last 12 months, pricing hasn't really come off too far,” Sykes explained.

“What has changed is developers and owners are taking a little bit more of a conservative approach to what those future rents could be in the future. I think they're starting to wind down the escalators, the year-over-year compounded growth rates that we saw over the past 36 months.”

Where annual escalators were at five per cent when rents were rising rapidly, Macdonald said they’re now in the three to four per cent range. She said some 10-year leases are including lower escalators in the last five years than in the first five.

Largest available spaces to lease

Here are the 10 largest completed industrial spaces available for lease in the GTA, according to Colliers (as of mid-April):

• Oxford Properties’ 1,092,629-square-foot space at James Snow Business Park at 10725 Louis St. Laurent Ave. in Milton;
• ONE Properties’ 729,388-square-foot space at 100 Ironside Dr. in Brampton;
• Panattoni’s 645,000-square-foot space at 4680A Garrard Rd. in Whitby;
• Metrus Properties’ 582,334-square-foot space at 9501 Highway 50 in Vaughan;
• Pure Industrial’s 458,496-square-foot space at 20 Whybank Dr. in Brampton;
• Emery Investments Ltd. and Rothman Real Estate Investment Ltd.’s 408,323-square-foot space at 8500 Mount Pleasant Way in Milton;
• AMB Ontario Nomco Inc. and Prologis’ 375,241-square-foot space at 2750 Peddie Rd. in Milton;
• Carttera’s 362,248-square-foot space at Avonhead Zero Carbon Industrial Campus at 587 Avonhead Rd. in Mississauga;
• Pure’s 341,896-square-foot space at 2550-2562 Stanfield Rd. in Mississauga; and
• Oxford’s 331,027-square-foot space at 2600 North Park Dr. in Brampton.