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Is the Industrial Real Estate Lease Market in the GTA Starting to Stabilize?

I've written in this blog before about the challenges of finding suitable industrial properties (warehouse, distribution, manufacturing) for my clients over the last few years in what has been an unprecedentedly strong industrial leasing market.

It was not unheard of during that time to see a property hit the market on a Monday, having a showing in the Tuesday afternoon the very next day, and be told by the listing agent at that showing that they were already expecting (or had already received) a couple of offers. Demand was strong and there just didn't seem to be enough availability to satiate the demand. As a result, there had been massive upside in rates during this time, Landlords became extremely picky about choosing Tenants, and inventory became extremely tight. Inventory became so tight that it was often the case that even if I had a Tenant client with very strong covenant (strong credit, strong financials, long operating history), there just wasn't much product to show them.

As I write this in October 2023 though, it seems that the crazy period of roughly 2020-2022, no doubt fueled by the COVID pandemic and the various upside pressures that event added to industrial demand (I'll save that for another post), may be coming to an end. I'm seeing on the ground that the competition for space has definitely let up, and there appears to be a stabilization in pricing. Whereas throughout 2021 and 2022 it appeared that asking net rent rates were literally appreciating by $1 per month, price increases have seemed to slow down significantly now. And where there was once very little product available in any given area depending on client specs, there now seem to be materially more options available. Another sign of a weakening and more balanced industrial market? We're starting to see more sub-lease space coming on the market, sometimes for very high square footage properties, something we weren't seeing often during the preceding period.

Though market data always lags real world findings by up to a few months, we can actually start to notice some of my anecdotal experiences showing up in the data. In the data below, which was scraped from actual TREB MLS lease listings for industrial properties, we've taken a close look Mississauga as an example, which is arguably the most sought-after and certainly the most active industrial market in the GTA. We've graphed the rent rate throughout each quarter of 2022 and up to the third quarter of 2023 which provides us with the most recent data to date. We've also graphed the days-on-market metric over that same period, which is the average number of days that all leased industrial properties were on the market before they were leased.

Let's start with rates. As we can see, average rent rates clearly trended up in a linear fashion throughout 2022, from a level of $15 at the start of the year to a level of $19 by the time we reached Q1 of 2023. However since that time, things have been flat. This aligns with what I'm seeing on the ground where there is a real psychological barrier for Tenants to exceed the $20 mark on rates.

Mississauga Industrial Lease Rates
Mississauga Industrial Lease Rates

Next we'll take a look at days-on-market, and what we can see in the graph below is that as we entered 2022, the average days on market dropped dramatically to a low of around 70, indicating significant strength in the market. But from that low point of 70 DOM in Q3 of 2022, days-on-market have been trending steadily upwards, reaching an average of 100 this latest quarter, Q3 of 2023. Such a consistent rise in this metric, and a increase of +30 over a one year period (a 43% increase), indicates that the market has slowed down measurably. The fact that properties for lease are sitting on the market for a longer period of time indicates that the competition for such properties is diminished. This can be caused by either a drop in demand or an increase in supply, or some combination of both. Below I'll briefly discuss why it's pretty clear that it's the former.

Mississauga Industrial Days on Market
Mississauga Industrial Days-On-Market

What is Causing the Market to Slow Down?

So we're definitely seeing the industrial real estate market in the Greater Toronto Area slowing down, and though it's already becoming apparent in the data as discussed above, I expect further data to emerge in the next few months (remember, the data is usually lagging) that will further reinforce what we're seeing on the ground. But that brings us to the question, what is causing this slow-down?

It's never a super simple answer, and more often than not there is more than one cause. However, the most obvious answer staring us in the face and one that I'm hearing mentioned in feedback when speaking with my clients, is the economic slowdown and uncertainty that we're experiencing at the moment. Following the rapid rise in interest rates from the Bank of Canada over the last 18 months, the economy is certainly starting to show cracks. After a surge in demand for warehouse and distribution properties during the pandemic, when industrial businesses were shoring up their inventory levels and reinforcing their supply chains, most businesses are starting to pull-back on such actions. Furthermore, many industrial businesses are seeing declines in demand from their customers and hence are starting to brace themselves for some economic pain. The impact this has on the industrial and warehouse property market is related to the fact that many of these businesses are putting expansion plans on hold and/or are less desperate to sign leases at whatever price the market is asking.

The other major factor, somewhat related to that above, isn't so much the actual economic pain being felt but the economic uncertainty that many businesses (and citizens) are grappling with at the moment. Without certainty over whether the BoC will continue to raise rates or hold them steady, and uncertainty over whether we'll hit a recession and how severe that recession could be, many industrial occupiers are putting their relocation or expansion plans on hold to the extent that they can in order to let things play out.

At this point, I want to provide a caveat. The industrial leasing market in the GTA is still very very strong. Vacancy rates remain below 2% in a market where a healthy vacancy number is thought to be 4-5%. Inventory remains tight and properties, especially the highest quality ones, are still leasing fairly quickly. And lastly, we have yet to see a reduction in prices. What we are seeing is a stabilization in pricing, and a return to a slightly more balanced market, albeit one that is still in favour of Landlords.

We'll see if these trends continue - if we see the economic pain that some prognosticators are predicting on the horizon, then we could quickly see demand for industrial and warehouse properties slide further. It's certainly something I'll be reporting on further as we wrap up 2023 and head into 2024.

For all of your warehouse, distribution, and manufacturing property needs, please don't hesitate to reach out to me.



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