In the Ontario commercial real estate market, there has been an uptick in demand and an inventory shortage of industrial real estate across the province. But how bad are supply levels?
In Toronto, for example, it is estimated that close to 45 million square feet would need to be developed and put into the market to achieve a five per cent availability rate. Today, there are approximately 14 million square feet under development in Toronto. Put simply; this is insufficient to satisfy demand.
Ontario is a critical industrial hub of Canada. The economic output of the most populous province substantially impacts the broader growth and stability of the Canadian economy. In the current economic climate, there are several sectors that are contributing to the inventory shortage in Ontario’s industrial space: e-commerce, manufacturing, and distribution and logistics centres. Supply conditions have failed to keep up with the demand for these industrial sector components amid limited land availability and a scarcity of new industrial development, resulting in higher lease and sale prices.
Because of these developments, a chorus of large and small businesses in Ontario are exploring alternative solutions or looking to lease industrial property in other areas of the country.
One place on their radar? Newfoundland and Labrador.
Industry in Newfoundland and Labrador
The growth of the residential real estate market in Atlantic Canada has been well-documented since the early days of the coronavirus pandemic. But what about the industrial real estate sector on the east coast?
While Newfoundland and Labrador maintains a smaller industrial market than Ontario, experts warn that the central province’s inventory shortage might indirectly affect other regions if businesses and investors pursue substitute locations. Therefore, according to various reports, the spillover effects of this shortage could impact Newfoundland and Labrador if businesses place a bullseye on the province.
If any of these expectations are accurate, demand from businesses and investors in Ontario could apply pressure on the industrial real estate supply in Newfoundland and Labrador. As a result, it would then trigger a shortage of suitable industrial properties for local businesses in the eastern province.
It is crucial to point out that industrial real estate has outperformed all other asset classes in Ontario: lease rates have climbed, and sales prices have surged. With companies being priced out of the market or unable to find supply, the belief is that firms and investors would extend their perimeter for spaces like distribution and warehousing facilities to other provinces, especially in an affordable jurisdiction like Newfoundland and Labrador.
Remember, Newfoundland and Labrador possesses an attractive and affordable price point for businesses, particularly when compared to Ontario. Should demand persist in Ontario, this would bolster the industrial expansion in the Maritimes, including St. John’s, where industrial real estate is currently the most robust commercial asset class.
Let’s consider a few facts presently facing the Newfoundland and Labrador commercial real estate sector:
- The biggest shopping malls in this province are 100 per cent leased.
- More retail space is under development.
- Demand for industrial space is rapidly growing due to the spillover effect.
- During the first three months of 2023, more than $37 million worth of commercial building permits have been issued in St. John’s, up 57 per cent from the same time a year ago.
“With Newfoundland-Labrador forecast to lead Atlantic Canada in terms of GDP growth in 2023, demand for commercial properties is expected to rise in tandem in St. John’s and surrounding communities,” a new RE/MAX report stated. “To date, commercial sales are up more than 20 per cent, while dollar volume has soared to $18.8 million, up from $6.4 million during the same period in 2022.”
That said, the economic landscape between Ontario and Newfoundland-Labrador is vastly different.
Essential industries in Newfoundland and Labrador consist of mining, fishing, oil and gas, and these sectors require different space requirements compared to more active sectors in Ontario, such as energy, banking and finance, information technology, manufacturing, and health care. However, the combined effect of demand from local businesses in Newfoundland and Labrador and those from Ontario indicates an industrial real estate market in this province that could report the same supply and demand challenges as Ontario in the future.
Another factor to consider is how effectively real estate developers in Newfoundland and Labrador can meet the requirements of investors and businesses in Ontario. Of course, as things stand today, the province will be affected by the industry inventory shortage in Ontario.