Industrial rental rates trended upward in 11 of the 12 metropolitan areas that Colliers Canada tracks during the fourth quarter of 2021. A newly released snapshot of Canadian markets finds vacancy rates below 1 per cent in five markets, and between 1 and 5.4 per cent in the seven other urban centres.
Topping the chart, industrial space in Victoria and Vancouver commanded average asking net rates of $16.47 and $16.31 per square foot (psf) respectively in markets where the vacancy rate has fallen below 0.5 per cent. That surpasses average asking rents for office space in five of the surveyed markets: Calgary; Regina; Winnipeg; Waterloo; and Halifax.
Across the 12 markets, Colliers pegs the vacancy rate at 1.3 per cent, with the availability rate at a somewhat roomier 2.2 per cent. That follows a year when nearly 39.5 million square feet of industrial space was absorbed and 21.7 million square feet of new supply came onto the market. Another 34.3 million square feet is under construction, but Colliers analysts foresee it will be leased quickly.
“Supply chain constraints have impacted the holiday season, with retailers unable to sell goods they don’t have. A shift from a just-in-time to a just-in-case inventory strategy is expected to drive demand for industrial over the foreseeable future,” they note.
Canada-wide, average asking net rents rose steadily over the course of 2021 to hit $9.65 psf by the fourth quarter. In addition to Vancouver and Victoria, asking rates in Saskatoon, Regina, Toronto, Ottawa and Halifax exceeded the national average. Elsewhere, lower rental rates still represent all-time market highs, such as in Waterloo, where industrial space commands an average net rent of $8.54 psf in a market where the vacancy rate has dipped to 0.9 per cent.
Toronto and Ottawa also posted record-high industrial rental rates of $12.66 and $12.22 psf respectively. Toronto’s vacancy rate has fallen to 0.3 per cent, while Ottawa’s sits at 1 per cent.
Toronto saw 13.6 million square feet of net absorption over the course of 2021 as about 11.5 million square feet of new supply was added to the market. About 10.2 million square feet is currently under construction, spurring competition among potential users.
“Actively marketed spaces are seeing multiple offers, highlighting the increasing importance of tenant covenants during the negotiation process,” Colliers analysts report. “Landlords now prefer deal terms between three to five years compared to the traditional 10-year term because of how fast rents are increasing. Annual rent escalations are starting at the 5 per cent range versus the 2 to 4 per cent range seen previously.”
Montreal’s average asking rents hovered just below the national average, at $9.23 psf, during Q4 2021, but they are projected to crack the $10 mark in the near future, as strong demand continues and industrial land constraints hinder delivery of new supply. As in Toronto, Colliers reports landlords are now favouring three-year deals.
Montreal’s industrial vacancy rate sits at 0.8 per cent. Last year saw 3.7 million square feet of net absorption with less than 770,000 square feet of new supply added to the market. About 3.9 million square feet is currently under construction, but Colliers analysts advise developers have been slow to deliver spec space.
“Land transactions remain highly competitive, resulting in developers pushing investment mainly to the South Shore (of the St. Lawrence River) for industrial development. Nine out of 16 land transactions since September 2021 have been in the South Shore,” they add.
With little open territory available, developers are looking to other options in Vancouver. About 6.3 million square feet of new space is currently under construction in a market with a 0.4 per cent vacancy rate — translating into less than 800,000 square feet of available space. There have been no vacancies in bulk or logistics space since mid-2020 and no spaces larger than 50,000 square feet have opened up for leasing since last March, even though about 3.2 million square feet of new supply was completed during 2021.
“Innovation from developers is occurring to meet these market conditions with various new forms of industrial development emerging, such as stacked industrial (both small and large bay), mixed-use with industrial on the ground floor and strata becoming increasingly common,” Colliers analysts state.
Calgary is viewed as something of a beneficiary of surging demand and tight supply in Toronto, Montreal and Vancouver. It offers the second highest vacancy rate — at 4.1 per cent — and the second lowest average net asking rent — at $8.31 psf — among the 12 surveyed markets, but both those tallies are indicators of marked improvement over the course of 2021. The vacancy rate dropped by more than 200 basis points from Q4 2020 in a year that registered more than 5.1 million square feet of positive absorption.
Nearly 1.6 million square feet of new supply came onto the market in 2021, and 7.3 million square feet is under construction, with 2.4 million square feet scheduled for completion before July this year. “The demand for mid-bay space is likely to result in more expansion in this segment compared to previous construction cycles,” Colliers analysts surmise.
Elsewhere on the prairies, Edmonton registers the highest vacancy rate among the 12 markets, at 5.4 per cent, while Winnipeg posts the lowest average asking rents at $7.95 per square foot. Winnipeg is the lone market of the 12 where rental rates slipped during Q4, but that follows the all-time high posted in third quarter. The vacancy rate also decreased over the last three months of the year, dropping to 2.8 per cent.
Outside of British Columbia and Ontario, Saskatchewan’s two cities boast some of the most robust trends in Canada. With a vacancy rate of 2.7 per cent, Saskatoon’s industrial space garnered average asking net rents of $12.31 psf in Q4. Regina recorded a 2.5 per cent vacancy rate and average asking net rents of $11.43 psf.
The sluggish pace of construction is believed to be contributing to the dynamic, as the arrival of new supply lags demand and developers also look to pass through their rising costs for construction materials and skilled labour. However, the markets appear well positioned for expected continue industrial demand. “With plenty of land inventory at the market’s disposal, Regina remains a prime location for growth,” Colliers analysts predict.
Looking east, Halifax is also enjoying buoyant industrial prospects, as average asking rents reached $9.89 psf in Q4 and the vacancy rate fell to 2.7 per cent. The market saw about 338,000 square feet of positive absorption in a year when no new supply was added. About 175,000 square feet is currently under construction.
“With limited new supply expected to be added to the market in 2022, the scarcity of options are leading tenants to reconsider their leasing strategy,” Colliers analysts report. “As developers are unable to keep up with demand for the foreseeable future, industrial vacancy is expected to remain low with rents set to continue to increase.”
