Industrial Real Estate Leads the Way, Lease Rates and Sale Prices Rising

For years, Canada’s industrial real estate industry has played a vital role in the nation’s overall economic growth, supporting a wide range of fields that are the engines of domestic and international trade and commercial activities. Even in today’s financial climate, Canada enjoys post-pandemic economic stability, with industrial real estate being crucial to this growth.

Indeed, industrial real estate in Canada has been seeing lease rates and sale prices rising steadily. In fact, according to various data, industrial is today’s top-performing commercial real estate class nationwide. It might be surprising, but industrial investment was at an all-time high in 2021 after the pandemic-induced stagnancy in 2020. This growth persisted in 2022 and is still holding steady in 2023.

While lease rates and sale prices vary across the country, they are generally travelling in an upward trajectory in many Canadian pockets. For example, industrial rents increased by 74 per cent in Montreal, 41 per cent in Calgary, 31 per cent in Toronto, and 18 per cent in Vancouver in 2022.

So, how are they influenced anyway? Several factors play an integral role:

• Property size and quality
• Location
• Market conditions
• Terms and conditions
• Amenities and services

Supply and demand dynamics also impact the industrial real estate market, with population growth, economic conditions, and government policies functioning as other leading contributors.

State of Industrial Real Estate in Canada

Overall, the trend of industrial real estate in Canada is demonstrating growth.

But what is driving this growth?

First, the demand for different types of industrial properties continues to increase whether it is warehouses, distribution centres, research and development facilities, manufacturing factories, or logistics hubs. As demand grows, the type of properties and their services continue to improve, ensuring increased prices and lease rates. In particular, demand for distribution centres and delivery facilities has advanced significantly because of the rapid growth in e-commerce. Similarly, thriving industries like technology and healthcare continue to drive demand and prices for industrial real estate.

Industrial real estate located in major industrial hubs tends to generate better rates and sale prices. These include Toronto, Ontario; Calgary, Alberta; Vancouver, British Columbia; Montreal, Quebec; and Edmonton, Alberta, to name a few. The new supply of industrial real estate is largely concentrated in four major urban centres: Toronto, Edmonton, Vancouver, and Calgary. This makes sense, considering that these locations maintain stellar access to highways, railways, and airports. Remember, proximity to transportation networks is often a priority for industries.

Other cities are realizing these fundamentals’ importance, including London, Ontario. A Toronto investment firm acquired a $36 million building, celebrating the city’s fundamentals.

“We love the London market,” Nexus Industrial REIT CEO Kelly Hanczyk told The London Free Press in May. “We’re one of the largest industrial landlords in the city. London has some of the best fundamentals in Canada.”

Meanwhile, going green can add tremendous value to industrial real estate properties, as they can incorporate sustainable technologies and provide eco-friendly features. Put simply; they tend to generate better rates. So, for example, properties with renewable energy systems, efficient waste management solutions, smart building technologies, and energy-efficient designs are more in demand today compared to buildings and facilities that still rely on outdated systems.

Ultimately, demand is higher for sustainable and technologically advanced properties because they reduce operation costs for tenants and buyers and also make them more environmentally responsible.

Industrial Real Estate Supply, Demand, and Pre-Leasing

Ultimately, the biggest driver of rising lease rates and sales prices is the gap between demand and supply.

It is no secret that supply is scarce or limited in various markets nationwide. This has been the main factor in lifting prices, especially in locations with high demand for properties that possess advanced facilities and services.

According to industry experts, undersupply has been a trend in Canada’s industrial space for the last several years. For example, the industrial market in Toronto has only 14 million square feet under development. With such limited supply, pre-leasing occurs rapidly, and prices remain high. Reports suggest that out of the roughly 27 million square feet of space under construction in Toronto, Calgary, and Vancouver that are anticipated to be delivered in the second half of this year, 38 per cent are already pre-leased.

It is evident that these growing trends for Canada’s industrial sector will continue. The better the location, the higher its value will be. Pre-leasing trends indicate that demand continues to be higher than supply, which suggests these prices will not trend downward anytime soon.