It's that time of year again. Please see below for my latest commentary on the state of the industrial real estate market, both in terms of leasing and sales, throughout the Greater Toronto Area.
OVERVIEW
If the industrial real estate market in the GTA could be equated to a Hollywood film, we would find ourselves firmly in the second act at the moment, that middle section of the movie when there isn’t a lot going on necessarily but it is slowly building momentum toward some sort of climax or change of direction. That’s perhaps a poor analogy to express the point that the market continues along the same slowing - but flattening - trajectory toward more balance and greater leverage on the part of tenants (I specifically don’t include “buyers” here, as we’ll discuss later that buyers still don’t have a ton of leverage), but that changing economic conditions either bullish or bearish may shift the tides at some point.
Time will tell if a near-term broad economic recovery will tighten conditions once again and bring things back into a landlord’s market where demand outstrips supply, but for the moment conditions remain balanced, and dare we say the market is “healthy” in the sense that transactions are happening once again but certainly on a more balanced pendulum between owners and occupiers. As will be discussed, though leasing conditions have loosened and options for available properties have increased for tenants, the sale market continues to remain muted with limited supply of properties for sale, and thus pricing that remains “sticky” in what is an occupier-driven market.
LEASING
The numbers tell most of the story in the leasing market. The overall vacancy rate throughout the entire GTA continued its slow march upward from 2.60% in Q3 to 2.70% in Q4. The rate of increase has slowed since late 2023 which was the start of a series of dramatic increases in the vacancy rate quarter to quarter. Those earlier sharp increases in vacancy reflected a more acute shift in the market at that time as interest rates rose rapidly and the market ground to a halt. In contrast, what we’re seeing now is a market that continues to show softness but that is leveling off significantly, and even starting to show some “green shoots” in positive activity. This has likely been aided by a significant reduction in interest rates over the last 12 months and a slight recovery in confidence among businesses to expand or relocate in the hopes of a stronger economy on the horizon.
One factor on the vacancy rate that cannot be ignored is the timing of major large industrial projects (100k+ sq ft) that are achieving completion and still vacant. These are projects that were green-lighted during the peak of the market in the 2021-2022 period and just coming online today, and such large-volume vacancies are having a material influence on vacancy rates. This means that though there is a relative abundance of spaces available above 100,000 sq ft, the market does not feel quite as soft in the sub-50,000 sq ft category as the numbers would otherwise lead one to believe. Certainly even in that size range supply is healthy, asking rates have come down, and landlord concessions are easier to come by, but it is not as much of a tenant-favoured market as it is for the larger bay spaces and there is still healthy competition for good spaces.
One submarket that is feeling the brunt of large unoccupied project completions more than any other is GTA-West (Mississauga, Brampton, Milton, Oakville, Burlington), where a higher concentration of new developments are situated. Not surprisingly, the vacancy rate in this area is the highest in the GTA at 3.5% - though interestingly this is unchanged from Q3 which was also 3.5%, no doubt reflecting the flattening conditions in the market.
Lease rates mirror the other market data in the sense that things are stable but continuing to soften slightly. Asking net rates for industrial properties in the overall GTA reduced in Q4 to $17.33, down from $17.47 in Q3. Though there have been steady declines in asking rates since rates peaked in Q4 of 2023, to put things in perspective the average asking rate of $17.33 in Q4 is still well above the average asking rate throughout 2022 of only $13.71, a time when the market was extremely strong. What this likely reflects are two things: 1) a natural lag between market fundamentals and asking rates, where the latter tends to rise and fall after some period of delay from when the market dynamics change, and 2) the rapid rise in asking lease rates from 2021 to 2023 seems to have been on a much steeper climb than the flatter rate of decline that we’re seeing now. As interest rate reductions continue to work their way through the economy and the inevitable economic recovery materializes, we should see asking rates in the GTA continue to flatten and then eventually begin to rise again. This report has in the past touched on the fundamental - and very hard to address - supply crunch in the GTA’s industrial property market, and we feel that this factor will re-emerge as a strong market driver and continue to have a pronounced effect on market dynamics once economic growth returns, as is likely to be the case later this year or in 2026.
SALES
The dollar sales volume for industrial properties in the overall GTA increased to $1.35 billion during Q4, up from $999 million in Q3. That being said, these volumes pale in comparison to the sales activity that was occurring during 2022 and 2023 when the market routinely experienced quarterly volumes in the $2 billion to $3.5 billion range. As has been noted here in the past, that stark difference reflects not just caution currently among buyers to pursue property purchases, but also (if not more) a reluctance among sellers to place their properties on the market these days in what are perceived to be weak market conditions. Distress among sellers has been almost non-existent in the GTA industrial asset class and so sellers are free to exercise full discretion on the timing of sales. This has resulted in a lack of supply of properties for sale, most obvious in the size range of 10,000 to 60,000 sq ft, which is the most sought-after size for medium-sized industrial occupiers in the GTA.
On the pricing side, due to the lack of supply as mentioned, as well as the fact that the sales market is currently driven almost entirely by occupiers rather than investors (investors simply can’t make the numbers work given current cap rates and interest rates), there has been a real “stickiness” on asking and transacted prices with only minimal reductions seen across the market. For context, the average sale price across the GTA in Q4 was $358 per sq ft, only a slight reduction from $361 per sq ft in Q3. During the peak period of 2022 to 2023 average sale prices were between $310 and $340 in any given quarter, and so despite the economic headwinds and greatly reduced sales activity we’ve seen in the last 18 months, pricing remains elevated. It’s worth noting as well that the GTA-wide average sale price of $358 spans all areas of the GTA and all property sizes, but when one zeros in on the aforementioned “holy grail” of size in the range of 10,000 to 60,000 sq ft in the core markets of Toronto, Mississauga, Vaughan, Brampton, or Markham, sale pricing is still routinely in the range of $400 to $550 per sq ft.
THE ELEPHANT IN THE ROOM
We would be remiss not to mention the story that has dominated the political and business news cycles over the past few weeks, namely the possible tariffs on Canadian goods announced by the new US President and any potential impact this may have on the GTA industrial market. Since – as of this writing - this is not an event that has yet come to fruition (and may never), there is no data to point to on this, other than the numbers and projections that have been speculated on regarding the potential impact to Canada’s economy. From an anecdotal perspective, Lennard brokers have heard from some clients about uncertainty with regard to business expansion or trepidation in making any major decisions until there is clarity on this issue.
But by and large most businesses appear to be unconcerned or at the very least indifferent about tariffs either because their business is predominantly local and thus insulated, or because there is growing sentiment that the tariffs will either not be enacted or be enacted in a greatly diminished form. In other words, as much as this issue has dominated news headlines, the most prominent stance among industrial occupiers seems to be one of wait-and-see, rather than any sort of panic. Of course, if these tariffs do materialize in any significant way over the next few weeks or months, then this issue is likely to have a more pronounced impact over the industrial market, not just due to the portion of GTA industrial occupiers that will be directly impacted, but due to the broader economic sentiment that is likely to impact the psyche of decision-makers across all sectors.
For the full report including all the numbers, please go to our report page here.