OVERVIEW
At the time of this writing the Bank of Canada has just lowered the benchmark overnight interest rate by half a point to 3.75% with a narrative that refers to their objective to try to “stick the landing”. There are further mentions abound about the Canadian economy possibly achieving a “soft landing” in light of a slowed but not severely recessionary economic environment. I mention this because the industrial real estate market in the GTA appears to be on a similar trajectory, in the sense that though the market has firmly come off of it’s COVID-induced highs from the 2019-2022 period, it appears to be a gradual return to more balance as opposed to a major bottoming out.
In fact, there is a sense on the ground among Lennard agents in the industrial space that, especially in the last few weeks, there is renewed interest from clients in making concrete real estate decisions, whether that means signing new leases or acquiring new facilities. Though the macro-economic environment appears to remain somewhat challenging for most businesses, a lower interest rate environment (no doubt spurred by the recent ‘jumbo cut’), easing inflation, and leading-edge indicators that point to signs of recovery have all provided a renewed sense of confidence and optimism among industrial property occupiers and owners. The data seems to bear this out with the fact that though things remain on a bearish trajectory, the slope of that trajectory has flattened somewhat. In other words, things are still slowing down, but we may be nearing the bottom.
LEASING
The vacancy rate for industrial properties throughout the entire GTA ticked up once again for Q3 versus Q2, rising from 2.5% to 2.6%. That being said, it was a slower rate of change than what we’ve seen in the past few quarters. For example, from Q4 of last year to Q1 of this year the rate rose from 1.9% to 2.3%, and from Q1 to Q2 from 2.3% to 2.5%. Those are increases of 0.4% and 0.2% respectively, with the latest change just 0.1%. The data seems to indicate that the market is starting to flatten, and we may very well see things level off and remain around the 2.6% level by the end of the year. This level puts us back to 2017-2018 levels and provides much more slack in the market than we saw in the 2019-2022 period when vacancy rates hovered between 0.8% and 1.5%, but actually represents a more balanced though still somewhat tight market. If economic conditions start to improve moving forward, as many analysts believe will be the case with a lower interest rate and inflationary environment, the market may actually start to see a tightening of the vacancy rate once again in the first half of 2025. One x-factor is the volume of new industrial development projects coming on board (many of which were initiated in the extremely strong market of a few years ago), but most of those larger developments have already come online, with a drastically slowing pipeline moving forward, so any upside impact of new development on the vacancy rate should be somewhat subdued in 2025.
In terms of asking net rates, despite an anomalous bump from Q1 to Q2 of this year, this latest quarter saw the average net asking rate for industrial properties GTA-wide drop from $18.11 to $17.47. That’s the lowest asking net rate since Q1 of 2023 and if the trajectory of rates mimics that of vacancies then it means we may be bottoming out and start to see Landlords try to push rates higher once again.
Tenants certainly have more choice these days than in the last 3-4 years, and more leverage in negotiations with Landlords, but the reality is that the market continues to be somewhat tight, especially in the smaller bay properties below 50,000 sq ft.
SALES
Sales volume for industrial assets throughout the entire GTA fell back down to earth after an anomalous increase in Q2, down to $999 million. That puts Q3 in line with the sales volume from Q1 of $940 million, and represents a reduction from the volumes in the range of $2-3 billion that were seen in the 2021-2023 years. That being said, industrial transaction volume is not necessarily an accurate reflection of demand in the market, but rather more indicative of supply. That is to say that during the last 18 months, many building owners – most of whom were not in distressed situations and had no need to sell – have simply sat on their hands and bided their time until a more favourable market returns. Drastically lower market volumes reflect this lack of listings just as much if not more than any reduction in demand.
The average price per sq ft on sales throughout the GTA for industrial assets of any size fell from Q2 to Q3 from $366 down to $361. Interestingly though, that average still exceeds the average of all previous quarters – for context, in the midst of Q4 2022, perhaps the last red-hot quarter for industrial assets, the average sale price was still only $314 per sq ft. This puts a spotlight on the stickiness with regard to sale prices and an unwillingness perhaps on the part of property owners to settle for prices that are lower than those of previous years, once again pointing to an asset class where the majority of owners are on stable financial footing and have no requirement to sell.
Anecdotally, many agents are reporting a renewed interest among clients to purchase properties, no doubt aided by the rapidly dropping interest rates. Furthermore, several properties on the market that appeared to garner little interest for some time have recently sold. This points to a potential upturn in sales, and one can hope that as the demand returns the willingness among sellers to part with their assets will be there to meet it.