Industrial

The industrial sector is facing headwinds amid softer demand and an influx of new supply. The market will continue to work towards normalization, which could come sooner than some expect.

Trends to Watch

1. Softer demand will continue to challenge the industrial market. Fundamentals suggest however that the market could see things start to turn as early as mid-2025.
2. New supply has been the primary headwind, delivering a record amount of supply right as demand wavered. Projects where ‘demisability’ was planned for will fare better in the year ahead.
3. Rental rates have started to moderate and are anticipated to continue this trajectory in 2025. Rent growth is not anticipated to resume until the market has time to absorb the recent excess of new supply.

Returning to positive net absorption

The Canadian industrial market is experiencing headwinds following a period of expansion and unprecedented market tightening. Softer demand amid an influx of new supply has resulted in rising availability, the pace of which is on-par with what resulted during the Global Financial Crisis. Current conditions are very different to 2008-2009, however; chiefly macro and structural issues at that time resulted in losses to the manufacturing sector and the retreat of companies from Canada, leading to over 20.0 million sq. ft. of negative net absorption over the course of one year. Present day, we have only had one quarter of meaningful negative net absorption.

Instead, what we’ve seen is 3PL’s and retailers overstretch, spurred on by the rapid growth of ecommerce, pulling forward future demand over the course of 2020-2023 and then put their pens down. Today, users in these industries are finding that they don’t need to take on more net new space because they already have that capacity or alternatively, that they took too much during that expansionary period and are now shedding it.

Some demand remains, nonetheless, with some regional variances. The food and beverage sector, and data centres are active nationally; auto and electric vehicle production plants are a part of the conversation in Ontario; and in Alberta, economic strength is resulting in heightened demand from local groups. The pickup among these users however is not enough to mask the overall drop-off from retailers and 3PL’s.

Anecdotally from client conversations, the return of robust demand levels feels like they could be one to two years away. CBRE’s U.S.-based Econometrics Advisors however are opining that based on historical patterns and Canada’s current economic outlook it could be as soon as mid-2025. There are reasons supporting this view - despite federal announcements curbing Canada’s immigration, Canada will remain among the fastest growing G7 countries across population, GDP, and employment growth. All of which will result in increased demand for logistics space. As well, with central bank policy rates coming down, business growth plans will be supported with more accommodative financing, helping to inject momentum back into the market.

The market has shifted from constrained to healthy market conditions where occupiers now have options to choose from. Deals will continue to happen in the year ahead but will take longer to complete amid this period of greater optionality.

Pressure of (spec) construction

The situation today may be better characterized as a supply problem that will continue to pose challenges for the market. The precipitous increase in availability can be linked to record deliveries amid a sharp reduction in demand. This is best showcased in the drop to pre-leasing activity, with just over a third of the total space under construction currently committed. Construction levels have accordingly slowed, with next year anticipated to deliver even less new supply than in 2024 at an estimated 25 million sq. ft.

What remains of the new supply pipeline is heavily composed of projects that kicked off on a speculative basis, accounting for over 70% of active development. These blank big boxes, however, are better suited for 3PL’s and in some cases are not fully aligned with the needs of today’s users. Instead, end users are looking to make long term commitments where they can justify investing for greater customization that aligns with their requirements, from clear heights to power capacity and automation.

Projects where ‘demisability’ was planned for will fare better in the year ahead, others are likely to drop off or stall at foundation work waiting for a tenant to be secured. While some may consider too much having been built right as demand was wavering, the market could easily see itself in an under-supply issue should activity abruptly resume. This will be more acutely felt in cities that have a longer than typical pipeline to delivery.

Finding the floor on rents

2025 is expected to be year of finding the floor and increased normalization of industrial market dynamics. Asking rents are an area to watch in that regard, as they have started to come off of peak pricing; in fact, 2024 will be the first year that we are anticipating a national annual decline, albeit a fairly moderate one. A mass correction back to rates seen three years ago isn’t likely, however there is room for the market to move down further in response to greater availability.

The landlord community is taking different approaches at this time, however, either reducing face rates or offering inducements most typically in the form of free rent. Properties in fringe areas of the market or with limited touring activity will be the first to see price adjustments. Core industrial areas meanwhile will always remain in demand and hold relative to other areas.

It is anticipated that rent growth will not resume until the market has time to absorb the recent excess of new supply. If the past is any indicator, an under 4.0% availability rate is the on-ramp to rent growth. Until then, we will see the market continue its current trajectory, gradually moderating back to normalization.