Q1 shows strengthening industrial space demand

Wednesday, May 11, 2016

Industrial space continues to command higher rents in western Canada than in markets to the east, but trends look mostly positive for warehousing and manufacturing in Ontario and Quebec. CBRE’s newly released overview of first quarter 2016 results reveals generally declining vacancies, and steady or slightly improved rents across 10 surveyed markets. Only Winnipeg experienced a fractional increase in its industrial vacancy rate, while asking rents dropped moderately in Edmonton and more steeply in Calgary.

Nationwide, CBRE reports average net asking rents of $6.50 per square foot, a 5.5 per cent availability rate and nearly 6 million square feet of net absorption during the first three months of this year. Vancouver and Montreal account for more than half of that take-up, but Edmonton, which boasts the country’s highest average net asking rent at $11.03 per square foot, also posted a healthy 1.1 million square feet of newly leased space.

Calgary’s availability rate of 8.1 per cent is among the highest in the country, although the market absorbed about 392,000 square feet of space during the quarter. The average net asking rent of $7.25 per square foot reflects a 13.7 per cent, or $1.15 per square foot, drop over a 15-month period.

Vancouver was the clear leader in construction activity with 1.1 million square feet of new industrial space coming onto the market. It also tops the chart for industrial land prices at nearly $2 million per acre — approximately 20 times greater than the lowest industrial land rates found in London, Ontario.

Land cost contributes to projections for “diminished” new construction in the future. Even so, more than 5 million square feet of new industrial space is currently under construction in Vancouver. An availability rate of 4.1 per cent is the second lowest of the 10 surveyed markets, while average net asking rents of $8.84 per square foot surpass the western Canada average of $8.76.

New supply has been more modest in the Greater Toronto Area (GTA) with completion of approximately 177,000 square feet of industrial space in the first quarter, but another 5.3 million square feet is under construction and approximately 2.7 million square feet is scheduled to hit the market by early summer. The GTA had Canada’s lowest availability rate, at 3.9 per cent as of March 31, along with average net asking rents of $5.48 per square foot.

Looking at market drivers, E-commerce growth and the low value of the Canadian dollar play into rising demand for distribution space, light industrial for film production and manufacturing facilities. Notably, online retailers are forging two-part logistics/delivery networks encompassing large-bay facilities in highway-focused distribution hubs and typically smaller buildings on the older industrial lands within urban cores.

A manufacturing resurgence underpins strengthening industrial space demand in Montreal and southern Ontario markets. Montreal’s industrial operators picked up more than 1.4 million square feet of newly leased space in the first quarter, including a notable single transaction of 430,000 square feet for manufacturing purposes. Availability and vacancy rates were evenly matched at 7.3 per cent as 143,000 square feet of new supply was added to the market.

From an investment perspective, industrial REITs delivered returns of 3.8 per cent, on average, for the first quarter — with Dream Industrial REIT’s seemingly incongruous 14.6 per cent return attributed to a rebound from a fall in late 2015.

“REITs with heavy exposure to Alberta were faced with some forms of uncertainty over occupancy erosion in the market,” the CBRE report states. “Despite challenging conditions faced in the overall REIT environment, fundamentals for industrial REITs are still generally favourable.”

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