City’s industrial availability rate to hit 4.4% in 2024 as new inventory floods market: CBRE

David Sali

March 11, 2024
4:23 PM
ET

Organizations: CBRE, Colliers, Manulife Investment Management, Rosefellow

People: Eric Whittington, Lindsay Hockey, Louis Karam, Matt Shackell

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Ottawa’s industrial availability rate is expected to jump to 4.4 per cent by the end of 2024 from 2.6 per cent last year as new large-bay developments flood the market – but rents will also keep rising due to the ongoing scarcity of small-bay inventory, a new report from CBRE says. In its 2024 Canadian real estate outlook released last month, the brokerage says more than 700,000 square feet of new industrial space is expected to be ready for occupancy in the National Capital Region before the year is out. Most of those are large-scale projects with 32- to 36-foot ceilings, such as Montreal-based Rosefellow’s two-building, 478,000-square-foot development on Huntmar Drive in Kanata, which is slated to be completed by late summer or early fall. The project was built on spec, meaning none of it was pre-leased before shovels were put in the ground. Colliers, which is marketing the development on Rosefellow’s behalf, is “fielding inquiries very regularly” but has yet to secure any tenants, said broker Lindsay Hockey. “We’re working on a few (proposals) that hopefully will come together,” explained Hockey, a senior vice-president in the national brokerage firm’s Ottawa office. “We’re optimistic.” Meanwhile, other new developments, such as Manulife’s two-building, 200,000-square-foot project on Bantree Street in the city’s south end, are still mostly vacant. Real estate experts caution that it will take a while for all that new space to get filled. The result is Ottawa’s industrial sector has hit a period of net negative absorption – something it hasn’t experienced for an extended period since the region became a booming e-commerce distribution hub during the pandemic. “The market is seeing lower pre-leasing numbers for developments being done on spec and will mean some delays for projects waiting for a tenant before kicking off,” CBRE said. CBRE Ottawa managing director Louis Karam says the city is still a sought-after market for logistics companies even as online shopping growth has slowed from its pandemic peak of a couple of years ago. “The question that I get a lot is, are we overbuilding?” Karam says. “In my opinion, I don’t think we are. I think it’s just going to take a little bit longer to absorb this new inventory, but in general it’s needed. It’s just going to take time. It will get absorbed.” Despite the expected rise in overall available space, CBRE’s forecasters say the fundamentals of Ottawa’s industrial market “remain strong.” The company predicts rents will continue to rise as more new inventory – which typically commands higher rents than existing space – hits the market. CBRE projects average asking net rents will reach $15.65 per square foot by the end of 2024, up from $15.44 last year and $13.63 in 2022. Experts say small-bay users such as plumbers, HVAC firms and other trades providers are particularly feeling the pinch, since many of the city’s new projects, with their taller ceilings and higher rents, are literally and figuratively out of their reach. Eric Whittington, a sales representative at Colliers’ Ottawa office who specializes in leasing industrial space, says many small-bay tenants are testing the open market, only to renew leases at their current buildings when they can’t find anything cheaper elsewhere. “I think there’s just starting to be some realization in the market that these are the rates and they’re not going to be coming down,” he said.

Manulife seeking tenants

His clients include Manulife, which still has about 150,000 square feet of vacant space available for lease at its new development on Bantree Street. With its 36-foot ceilings and rows of large-bay loading docks, the facility is tailored to users like shipping companies and suppliers of big-ticket items such as construction equipment. Asking rents are in the $18-per-square-foot range, Whittington said, while older industrial facilities with lower ceilings in the same neighbourhood are typically charging $15 to $16. He said a couple of potential deals are in the works at Bantree, including one with a company that wants to lease up to 67,000 square feet. However, Whittington notes that such facilities aren’t ideal for smaller industrial enterprises, such as plumbing and heating companies, that don’t need as much storage space or lack forklifts and other specialized equipment to navigate it. Those users are being left behind in the latest wave of new construction, he added. “There’s been some talk in the market about a few people developing some more small-bay facilities, but the net rents are going to have to be up in the 20s to justify the costs of building,” Whittington said. “Ottawa is really a build-it-and-they-will-come type town. Until you have a complete building up, it’s hard to really judge interest.” Karam agrees finding vacant space continues to be a challenge for such users. “Small-bay (space) is virtually not available,” he said. “So for tenants that are looking for options, there aren’t any out there.” Longtime industrial broker Matt Shackell said good-quality small-bay space remains at a premium in Ottawa, but that’s not what’s being built. As a result, he says, many of the larger developments are struggling to find tenants. “A lot of these (brokerages) have been sugar-coating it for quite some time,” said Shackell, a vice-president at Lennard Commercial Realty. “Tenants here, they’re looking for smaller space that’s affordable. It’s challenging because you have to make the math work on either side of the equation.” Developers are being forced to “sit tight and wait for the right group” while still paying taxes and maintenance costs on buildings that are mostly empty, he added. “That’s the brutal, harsh reality of being in this market right now,” Shackell said. Whittington said he expects the space will eventually get absorbed. “With time, we’re hoping some of the local companies will grow into those spaces and give up some of their smaller locations – and then hope for an influx of new companies coming in from Toronto and Montreal.”