The small bay industrial real estate sector in Canada has been undergoing a transformative shift driven by economic changes and evolving market demands.

These multi-tenant properties, with ceiling heights of 14-20 feet and units ranging from 2,000 to 10,000 square feet (up to 20,000 sf), are becoming increasingly valuable in the eyes of specialized owners.

Ownership shift: From institutional to tenant-led demand  

For decades, institutional real estate owners and developers dominated the small bay industrial sector. However, partially due to the rising costs of managing numerous tenant relationships and smaller units, these owners have increasingly pivoted toward mid and large bay industrial properties, which are easier to manage and attract a different tenant profile. But this shift is creating a sector-specific ownership gap.

Meanwhile, small and medium-sized enterprises (SMEs) are facing rising rents and a lack of available spaces. Rental rates for small bay industrial units have surged over the past decade, with KOLT Investments observing GTA industrial rents increasing from the low $5s to the low $20s per square foot while overall industrial vacancy rates have plummeted (4.6% in 2014 to 2.5% in Q2 2024)(1). Immigration has further driven demand, particularly in the GTA, where rapid population growth and business expansion have strained the limited industrial inventory. 

The rise of industrial condo conversions 

Filling the gap, companies specializing in industrial condo conversions have emerged, offering a viable solution for small to medium entrepreneurs (SMEs). Companies like KOLT Investments (formerly TAKOL) have been at the forefront of this movement, converting ‘for rent’ buildings into ownership opportunities while also modernizing the converted properties, providing the end user with a ‘better box’. In this changing marketplace, owners of SMEs, who previously accepted the cost volatility of renting, now have an opportunity to achieve cost certainty while also building significant wealth through ownership of the units they occupy. 

Condo conversions are not without their challenges, and the conversion process demands more than just managing the complexities of resolving existing tenant contracts and submitting condominium applications. It requires a reliable and tested partnership capable of raising significant capital, managing investment commitments, and coordinating with experts in the field. 

KOLT’s knowledge in these areas, along with their proven track record, has positioned the company  as a leader in this space. As Daniel Kolber, Principal and Co-Founder of KOLT states, “We specialize in condo conversions. Recognizing the ‘emerging demand’ of ownership is not new, but properly servicing that emerging demand is.” 

A prime example of this success is KOLT's first project on Edvac Drive in Brampton. From acquisition to final unit sales, the project – a 64,000-sf conversion – was completed in just 16 months. This early success helped validate the company’s belief in the demand for ownership within the small bay industrial sector. 

Over the past five years, the small bay industrial condo market has seen significant growth, with multiple projects being converted. As Kolber explains, “We can often acquire projects for less than their replacement cost, and with existing cash flow from in-place tenants, it takes less time than a new development while generating comparable returns.” 

Looking ahead: A future for small bay industrial ownership 

Despite recent pushback on immigration, Canada’s urban populations continue to grow, with the GTA outpacing most, and in lockstep, the demand for small bay industrial properties is also increasing. With the growing demand for housing, commercial demand is pushing into the surrounding municipalities, where the inventory of small bay rental properties is lacking. As traditional developers opt out of the small bay sector, the opportunity for ‘new’ small bay industrial condo development is emerging. 

Just outside Toronto, the Town of Milton is projecting a population increase of 75% over the next 5 years (2024 to 2029). KOLT is taking a lead position in addressing this growth by partnering with investment group CMCC Capital Funds and architects Ware Malcomb, to deliver the Milton Gates Business Park: a ground-up small bay condo development totalling 425,000 sf+, with individual units ranging from 1,700 sf to 12,697 sf. Town staff and local politicians have shown strong support for the project, informing KOLT of the current existing shortage of small bay industrial and commercial spaces in the Milton area. However, the opportunity this development presents goes far beyond bricks and mortar. By providing small business owners with the opportunity to own the real estate they occupy, not only are the economic needs of the municipality met, but the owners themselves are granted the opportunity to prosper as ‘stakeholders’ in their chosen communities. 

Looking 10 years into the future, it’s clear that small bay industrial ownership will play a critical role in supporting the growth of SMEs across Canada, and that rising rents, demographic changes, and limited inventory will continue to drive demand for ownership opportunities. In the words of Kolber, "We anticipate an increase in ownership among small business operators, especially entrepreneurs. This shift towards ownership gives them a means to build wealth, stability in a fast changing market, and a sense of belonging." 

(1) Costar 2024