Increasing vacancies signal relief for warehouse renters

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by Emily Atkins

National industrial property vacancy notched its 4th consecutive increase, rising to 2.1 percent on the quarter, according to numbers released by realtor JLL.

Occupier demand, particularly from large bay users, moderated as the market witnessed net absorption well below the five year quarterly average. With a cyclical high in construction deliveries expected over the next 12 months, vacancy is expected to continue its rise through 2024.

However, vacancy is still expected to remain below the long term historic average.

Greater Toronto moderates

The GTA industrial market continued relative moderation as vacancy rates saw gradual increases paired with smaller quarter-over-quarter (QoQ)increases in average net asking rents. Market vacancy increased to 1.6 percent, the highest rate since Q1 2021.

All GTA submarkets remained at or above the 1.5 percent mark during the quarter, ranging from 1.5 percent in the GTA North to 1.8 percent in the GTA Central area. Average net asking rents increased to $18.69, a 15.2 percent increase year-over-year and a mere 0.80 percent increase QoQ. Such a marginal increase contrasts with the 5.9 percent increase seen between Q2 and Q3 2022, suggesting that the pandemic era of high rental escalations is coming to an end.

Tenants will contend with a tight but gradually balancing market into 2024. Delivered square footage is expected to continue to outpace total
absorption as the GTA’s massive construction pipeline reaches delivery. When paired with decreasing pre-lease rates, tenants can expect QoQ
increases in vacancy and near negligible increases in average net asking rents.

Three quarters of vacancy increases in Vancouver

The Metro Vancouver industrial market showed signs of softening as availability and vacancy went up by 60 bps and 30 bps, respectively. Direct average asking rents decreased for the first time in 11 quarters as a result of price reductions and listings sitting on the market for extended periods.

Weakened tenant demand was evident as only two headlease transactions over 50K s.f. went firm this quarter. Choice Properties’ REIT leased its 353,476 s.f. development at 18899 24th Avenue in Campbell Heights to Pet Valu with completion due for Q4 2023. On the buyer side, high interest rates and borrowing costs have kept investors hesitant to make purchasing decisions.

Lease rates could come under pressure if availabilities continue to increase at the current rate. This will give tenants more options to choose from, balancing out a previously landlord-favored market. The expectation that the Bank of Canada will hold interest rates for the next few months could fuel optimism on the buyer side and sale prices will continue to fall.

Asking rates fall in Montreal

A rendering of Rosefellow’s industrial facility in Pointe-Claire, Que., which will house Dormez-vous and Steve Madden Canada. (Courtesy Rosefellow)

Average asking rents stumbled for the first time since Q3 2020, in Montreal markets, breaking a 12-quarter streak of increases. The contraction signals a weakened appetite for industrial spaces as tenants navigate fiscal decisions with caution due to incessant economic uncertainty.

Nonetheless, pricing expectations have declined by 40 cents QoQ. Despite the decrease, asking rates are still 14.6 percent higher than those observed a year ago.

Availability and vacancy rates rose once more, bringing long-awaited balance to the market. This quarter, nearly 550,000 sf of additional sublet space became available, most of which originated from on-island submarkets including the West Island, Midtown North, Saint-Laurent and the East End.

Increased market uncertainty has created a much more balanced market than witnessed during the pandemic years. Availability, vacancy, and
negative absorption should continue to rise, thus deterring landlords from raising asking rate expectations. It’s expected that an increasing number of new industrial developments will either be delayed or designated as build to suit.