Industrial real estate still strong as economy cools

by Emily Atkins

With North American stock markets dangerously close to correction, bricks and mortar properties continue to resonate with institutional and private investors, across almost every commercial asset class in major Canadian centres.

The RE/MAX Canada 2022 Commercial Real Estate Report found demand for industrial, multi-unit residential – particularly purpose-built rentals – and farmland was unprecedented in the first quarter of 2022, with values hitting record levels, while retail and office are starting to show signs of growth in multiple markets.

The report examined 12 major Canadian centres from Metro Vancouver to St. John’s. It found that 92 percent of markets surveyed (11 of 12) reported extremely tight market conditions for industrial product in the first quarter of 2022. NewfoundlandLabrador was the only outlier.

Challenges in industrial space

Eight of the 12 markets surveyed found challenges leasing industrial space. Included in the mix were Vancouver, Edmonton, Calgary, Winnipeg, Ottawa, the Greater Toronto Area, HamiltonBurlington-Niagara and London. Some realtors are recommending tenants start their search for new premises at least 18 months before their current leases come up for renegotiation.

Development land remained sought after (industrial/residential) in eight of 12 regions, including Vancouver, Calgary, Regina, Saskatoon, Winnipeg, Ottawa, the Greater Toronto Area and HalifaxDartmouth.

End users are encountering challenges in expanding their businesses due to land constraints/shortages, with specific mentions of this noted in Vancouver, the Greater Toronto Area and Regina.

Christopher Alexander

“The overall strength of the Canadian economy continues to propel massive expansion in commercial markets across the country in 2022,” said Christopher Alexander, president, RE/MAX Canada.

“What began as heightened demand for industrial space to accommodate a growing e-commerce platform during the pandemic has blossomed into a full-blown distribution and logistics network that encompasses millions of square feet in markets across the country. Recent volatility in the stock markets has also prompted a shift to greater investment in the commercial segment as investors look to real estate as a hedge against inflation.”

Creative use of land

Given the current shortage of space, developers and end users looking to build have become increasingly creative in 58 per cent of markets surveyed, including Metro Vancouver, Edmonton, Regina, Saskatoon, Winnipeg, London, and the Greater Toronto Area. The supply/demand crunch has proven the adage, ‘necessity is the mother of ingenuity’, as new solutions emerge in the marketplace.

In Metro Vancouver, Oxford Properties introduced the first industrial multi-storey industrial/commercial space in 2019 and a second stratified multi-storey facility is planned for False Creek Flats. The first building is nearing completion and leased to Amazon while the first and second phase of the False Creek development is sold out and a third phase is currently selling at $725 per square foot.

Land reserves

In the future, municipalities may also consider industrial land reserves, registered areas dedicated to industrial in municipalities that are experiencing land constraints, given overwhelming demand.

“Land development is pushing city boundaries in major centres and municipalities are scrambling to accommodate residential and industrial intensification,” Alexander said.

“At present the process is painfully slow in most centres, even where land is already serviced. Given the on-going likelihood of demand, policy that helps availability or fast-tracking of approvals would certainly be a boon to the market.”

Institutional and private investors remain exceptionally active in the commercial market across the country, spurring demand for industrial/office/retail product on a large-scale basis. Extensive portfolios are a primary target, especially those containing 10 or more properties.

Spillover from activity in major centres is also serving to bolster smaller, secondary markets, where affordable price points, in relative terms, prove attractive, especially as savvy investors anticipate future needs and potential, given urban sprawl, density, population growth, pricing and inventory trends.

Continued strength predicted

Continued strength is forecast in commercial markets, supported by population growth and further economic expansion. According to the RBC Economics Provincial Outlook published in March, GDP growth is expected to climb to 4.3 percent in Canada, led by BC, Saskatchewan, and Alberta in 2022.

An unquenchable demand for product in the industrial, multi-unit residential and farmland sectors will persist as intentions remain strong, despite a serious scarcity of inventory. Buyers, large and small, will continue to seek opportunity as investors increasingly favour tangible assets.

Dollar volume is up across the country in almost every market as the principals of supply and demand impact values. Lease rates are also edging upward.