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Monday, May 13, 2019

Canada – E-commerce demand sparks tight conditions, investor appetite


By Bill Argeropoulos (Toronto)
Canada’s industrial market has started 2019 on a strong footing, building on the exceptional results achieved in 2018. While Vancouver and Toronto remain key markets for occupiers and investors, scarcity of product was evident in the single-digit vacancy rates posted across the country in the first quarter of 2019.

Nationally, the industrial sector remains undersupplied – demand is outpacing new development and will continue to do so, even though almost twice as much space is under construction compared with spring 2018. This supply-demand imbalance has pushed rental rates higher in almost all markets, attracting investors and resulting in low yields and rising asset values.


E-commerce remains the industrial sector’s catalyst for success as retailers and developers strive to perfect the supply chain. Online giants such as Amazon are impacting market dynamics in terms of scale and location with their demand for large distribution/fulfilment facilities near urban centres, resulting in rising land and development costs amid dwindling supply of developable land. This situation is most apparent in Toronto and in Vancouver, where strata units increasingly offer the only opportunities for developers to justify their land costs. 

Record-Low Vacancy – Canada’s industrial vacancy rate remains at a historic low, ending first-quarter 2019 at 3% – down 70 basis points (bps) from the same quarter in 2018. Ten of the 11 markets surveyed reported lower vacancy year-over-year and single-digit vacancy rates (with four markets posting rates below the national average.) In the North American context, Canadian markets – Vancouver, Toronto and Ottawa – recorded the three lowest vacancy rates through the first three months of 2019.

Absorption Totals Up  Twelve-month absorption totalled more than 27 million square feet (msf) – up from almost 20 msf in the previous 12-month periodToronto accounted for slightly more than half (52%) of the nation’s absorption tally, while strong year-over-year gains were posted by Vancouver, Calgary and Montreal.


Strong tenant demand and limited supply boost net asking rents – Strong tenant demand in Montreal, Toronto and Vancouver lifted Canada’s average net asking rental rate to a high of $8.66 per square foot (psf) at the end of the first quarter of 2019. Five markets posted rents above the national average. Rents were highest in Vancouver ($11.49 psf). Regina ($10.94 psf) and Ottawa ($10.66 psf) were the other two markets achieving more than $10 psf, while Montreal ($6.71 psf) registered the biggest annual rental-rate increase – up 11%.

Development pipeline remains robust – Year-over-year, the total industrial area under construction jumped to 27 msf (66% preleased) from 16 msf. The 27 msf total equated to only 1.3% of Canada’s existing industrial stock of 2 billion square feet (bsf). Total area under construction more than doubled in the country’s largest industrial market, Toronto (12.2 msf ). Vancouver (5.2 msf ) led the West, while construction doubled in Montreal (3 msf ).



Inbound Capital Investors poured $7.8 billion into the Canadian industrial property sector during the 12 months ending in March 2019 (up 7% year-over-year). Nearly two-thirds of that total was directed to Toronto and Vancouver, which also recorded the lowest yields among large North American markets (4.6% and 3.9%, respectively).

Sale Prices Increase The national average sale price per square foot (psf) increased $20, or 15%, year-over-year to $154 psf. Vancouver’s figure (up 37% to $387 psf) was more than twice the national average, while Calgary (up 32% to $209 psf) was the only other Canadian market to breach the $200-psf mark.

Canada’s industrial market is expected to remain active throughout 2019 with restricted supply posing challenges for occupiers and investors. However, necessity is the mother of invention, and these circumstances may lead to creative and innovative solutions for the thriving industrial sector.
These are some of the key trends noted in Avison Young’s Spring 2019 Global industrial Market Report covering 64 markets in seven countries across the globe: Canada, the United States, Mexico, Poland, Romania, the United Kingdom and South Korea.

(Bill Argeropoulos is an Avison Young Principal and the firm’s Canadian Research Practice Leader. He is based in the company’s global headquarters in Toronto.)

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