A new report suggests Ottawa’s industrial market “may have reached a peak” after a pandemic-fuelled e-commerce boom triggered unprecedented demand for warehouse space, but it says rents are still expected to rise amid an ongoing supply shortage.
In its latest industrial office market report released this week, real estate firm Avison Young says Ottawa’s industrial vacancy rate rose to 1.5 per cent in the first quarter of 2023, up from 0.8 per cent a year earlier.
“With rental rates having stabilized over the last year, it would appear that the industrial market may have reached a peak in Ottawa, in particular for larger offerings,” the company said.
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Still, Avison Young says tenants looking to renew leases “may still face significant increases” in their rent bills as demand in many areas continues to outpace supply.
The report said rents continued to climb in the first quarter, to a gross asking price of $21.70 per square foot. Asking net rents ranged from about $11.50 per square foot for buildings of less than 10,000 square feet, to nearly $14 in buildings of more than 100,000 square feet.
“Scarcity in the market leaves little room for tenants looking to negotiate,” the firm said.
Michael Church, the managing director of Avison Young’s Ottawa office, said factors such as rising construction costs and a scarcity of development land have limited the amount of new supply in the National Capital Region.
Roughly 332,000 square feet of new industrial space is currently under construction in the Ottawa area, representing about 0.67 per cent of the region’s total inventory, Church said.
By contrast, developers in Montreal are currently building seven million square feet of new inventory, which equates to nearly two per cent of that city’s total industrial stock.
Ottawa is traditionally a “cautious” market for developers, Church noted. He said the city is unlikely to see the kind of “unbridled growth” in inventory that would drive down rental rates.
At the same time, he added, the industrial renaissance that saw rents jump 20 per cent since the start of the pandemic is unsustainable in the long run.
“It’ll find a level like everything else,” Church said. “You can’t have hockey-stick growth forever. It’s not realistic to expect it. Things will cool off a little bit, but you’re not going to see a precipitous drop in rates, I don’t think.”
Veteran broker Matt Shackell cited a number of factors that are making developers think twice about launching new builds, including a steep rise in interest rates that has made financing such projects more expensive, soaring construction costs and development fees that run about $11 to $12 per square foot.
“The market’s still doing well, but it’s just not where it was eight months to a year ago,” said Shackell, the vice-president of Lennard Commercial Realty’s Ottawa office.
“People are re-evaluating doing business here. Before you even put a shovel in the ground, you’re in it for a couple million bucks to the city (in development charges). It’s a daunting thing. These are huge numbers that we’re talking about here.”
Like Church, Shackell thinks rents will keep rising until the market finds an equilibrium.
He said some landlords “realize that the market’s changed drastically and they’re happy with getting $14 per square foot net rent with reasonable escalations.”
But owners of new projects saddled with rising construction budgets are passing those extra costs on to tenants, he added, driving up rents in those spaces.
“Any new developer that is looking at building here in Ottawa, they have to have a minimum of at least $18 (net rent) per square foot to make the numbers work,” Shackell explained.
“Every developer wants to have their maximum return, but they also have to make sure they don’t lose their shirt when doing these deals. It makes it extremely difficult to actually get (leasing) deals done because the rents are so high.”
While Shackell said he’s seeing a slowdown in the overall volume of deals as well as sales transactions, Avison Young said sales volumes in Ottawa “remain robust.”
Sixteen industrial buildings changed hands in the first quarter, up from 10 a year ago, the company reported.
Sarah Vandenbelt, a broker at Koble Commercial Real Estate, said her firm is “getting inundated with referrals” from customers looking to acquire industrial space.
Vandenbelt helped close a sale last week in which a “major Ottawa corporation” purchased a 30,000-square-foot cold-storage facility on Hawthorne Road for $11.3 million, or more than $375 per square foot.
She said the buyer doesn’t plan to use the space for cold storage, but paid a premium for it anyway because the investor market in Ottawa is so tight.
“When I started in the industry 10 years ago, we were seeing $200 a (square) foot or $150 a foot,” Vandenbelt said. “A lot of the inventory that is out there is older and requires more capital upgrades, and a lot of people aren’t willing to build because of construction costs.”
She said soaring rents are forcing tenants to be “super creative” to control costs – to the point where some companies are now turning to self-storage units and converting them into office and warehouse space.
The trucking company that previously owned the Hawthorne Road cold storage facility is renting it back for a year because it’s still looking for a new home, she added.
“Businesses can only sustain so much,” Vandenbelt said. “Tenants just really don’t have control anymore.”
Shackell said relief should soon be in sight for beleaguered tenants.
Several new industrial projects are slated to come online in the next few years, including two buildings on Huntmar Drive in Kanata totalling nearly half a million square feet that his firm is pre-leasing on behalf of Montreal-based developer Rosefellow.
“By the time that actually gets built … the market will have balanced itself out, we believe,” he said.
