Commercial: Industrial Space – Market Outlook
The industrial market, often overlooked in the past, has undergone rapid change, particularly accelerated by the pandemic. Previously characterized by modest rents and low visibility, industrial real estate has surged in importance due to the exponential growth of e-commerce.
The shift to online shopping has driven demand for industrial space, transforming traditional warehouses into fulfillment centers. This surge in demand has propelled industrial vacancy rates downward and led to historic high average asking rents.
Industrial Market: Rapid Transformation
The Greater Montreal Area’s industrial market continues to see demand soften as the availability rate climbed to 3.0% in Q4. In general, warehouses in well-located areas with easy access to major transportation routes remain in high demand. Small bay industrial spaces are gaining attention from developers due to a lack of recent construction in this segment.
While rental rate growth is stabilizing, the outlook for industrial remains strong. Although new supply is gradually meeting demand, land constraints along transportation corridors and within the crucial “last mile” to consumers ensure a tight market.
- “Big Box” listings of over 100,000 square feet are remaining longer on market than in past quarters and represent 41% of the total available square footage. Last year, “Big Box” availabilities represented only 32% of all available space.
- Sublet availabilities have surged to 1.1 million square feet, marking the highest amount in 23 quarters, and is expected to continue its upward trend in Q1 2024.
- Asking net rental rates softened slightly for a second consecutive quarter to $16.31 per square foot, with an annual growth rate of 0.9%. Only one year ago the annual growth rate was 75.2%.
This strong market performance has made industrial properties highly sought after by investors and lenders, leading to intense competition for acquisitions and loans. Canadian investors can leverage insights from the U.S. market, which tends to be ahead by three to five years, to identify emerging trends and opportunities.
Looking ahead, innovations like industrial outside storage and multilevel industrial buildings, as well as the potential impact of driverless trucks, are key areas for investors to monitor for future growth opportunities.
Industrial Real Estate: A Best Bet with Caution
- Industrial Market Normalization
- Industrial market fundamentals are predicted to continue normalizing in 2024.
- Industrial real estate remains a top choice, although there is more cautious sentiment about the upcoming year.
- Available new supply entering the market will lead to a rise in availability rates,albeit remaining below the long-term historical average.
- Focus areas include manufacturing, warehousing segments, and niche areas like data centers, which continue to attract industry players.
- Subdued Rental Rate Growth
- Rental rate growth is expected to be subdued in 2024 as markets adjust to a more balanced environment.
- The national average rental rate is forecasted to effectively remain flat year-over-year.
- Alignment with Economic Performance
- Major sectoral tailwinds have mostly been realized, resulting in industrial demand more closely aligning with overall economic performance moving forward.
Sources:
This article reflects our research of reports and evaluations by CBRE Canada, PWC report, Globe & Mail, Colliers Canada, Avison Young, and JLL Canada.
