Ottawa industrial rents keep rising even as vacancies double in Q2: Avison Young

Ottawa’s industrial vacancy rate more than doubled in the second quarter compared with a year earlier as some tenants began moving into newer buildings with smaller footprints, Avison Young says in its latest market report. The city’s industrial vacancy rate was 1.7 per cent at the end of June, the real estate firm said this week, up from 0.8 per cent in the same period in 2022.  Avison Young said the spike was partly due to increased activity in the sublease market. There was an additional 880,000 square feet of vacant space in Ottawa last quarter compared with a year ago, including 55,000 square feet of sublet space. “Interesting to note is that the pace of increasing lease rates has slowed somewhat, suggesting that we might expect to see prices stabilizing over the next quarter as more available older-stock space makes it way to market,” the report said. “This is being created by the movement of some tenants into new product with reduced footprints.” At the same time, however, average asking net rents jumped from about $12 a square foot in the second quarter of 2022 to more than $14 last quarter, the firm reported, suggesting that demand for industrial space continues to outpace supply. “Until the supply/demand curves revert to pre-pandemic levels, one can expect to see continued elevated local industrial rates – which have increased by 18.85 per cent since Q1 of 2022,” the company said. “The industrial asset class continues to outperform all other CRE asset types.” Michael Church, managing director of Avison Young’s Ottawa office, noted that industrial rents are now exceeding average office rents by as much as $10 a square foot. “It’s still very much a landlord’s market,” said Church. “The (industrial) sector is going to continue to perform well simply because we just don’t have enough product yet.” Church said that as Ottawa’s population grows, the region is “becoming a distribution hub of its own kind.”  That particularly benefits the southwest end of the city, with its close proximity to Highways 416 and 417 that allows e-commerce distributors easy access to major markets like Toronto and Montreal.  Ottawa South – which includes Nepean, Osgoode, Rideau and West Carleton – had a vacancy rate of just 0.3 per cent in the second quarter, compared with 2.4 per cent in Ottawa West and 2.2 per cent in Ottawa East. Church said would-be tenants are still feeling the crunch. As an example, he said he could find only two available properties that fit the bill for a client who was seeking an 8,000- to 12,000-square-foot industrial footprint with specific requirements. “It’s hard to find the right kind of space,” he said. “People are making stuff work.” Some relief is in sight, however.  Seven projects totalling 330,000 square feet of new inventory are currently underway in Ottawa. Meanwhile, Colonnade BridgePort is set to start construction this fall on the four-building, 900,000-square-foot Gateway Industrial Park near the corner of Strandherd and Citigate drives. “I know they’ve gotten a fair bit of (leasing) action,” Church said of Colonnade BridgePort, which is handling the project’s construction, leasing and management on behalf of Toronto’s CanFirst Capital Management. But that still amounts to less than 1.3 million square feet of new product in an industrial market with an existing inventory of just over 50 million square feet. It will help, Church said, but he predicts it won’t make enough of a dent to materially drive down rental rates. “As some of that (construction) starts to happen, there will be some downward pressure, but it will just be a level-off,” he said. “There won’t be a precipitous drop (in rents). The industrial class is just too strong.” Still, there are signs that macroeconomic factors such as inflation and rising interest rates might be dampening investor interest in the Ottawa market. Since the fourth quarter of 2021, when 16 industrial properties changed hands for a total of $110 million, sales activity in the sector has steadily declined. Between April and June of this year, there were 10 transactions valued at $40 million. But Avison Young reported that several properties sold for well over $300 a square foot last quarter, signalling that investors are still willing to pay a premium for buildings in sought-after locations. “It’s all about (rental) income,” Church explained. “They’re not growing any more of that land. It’s kind of a limited supply, and (rent) numbers are pretty healthy. “The stars have lined up for the industrial sector. I think it will continue to perform.”