Available space in Ottawa’s industrial buildings fell slightly in the third quarter as small-bay tenants continued to snap up what little inventory remains in one of Canada’s tightest markets.
The city’s industrial availability rate dipped to 2.2 per cent at the end of September, down from 2.4 per in the second quarter, CBRE said in its latest market report released this week. Average asking net rents rose for the eighth consecutive quarter to $15.50 per square foot, a 15 per cent increase from a year earlier.
“I think there’s a lot of talk of the industrial market slowing down, but we’re not seeing a slowdown here in Ottawa,” CBRE Ottawa managing director Louis Karam told OBJ this week. “Demand is still there, and it’s continuing to push our asking rents higher.”
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CBRE said the lack of new supply and limited vacancies mean existing tenants are electing to renew their leases at higher rates.
Karam said the space crunch is especially acute for tenants in small-bay properties who have few choices when it comes to available inventory.
“As a large-bay user, options are there and (more) are coming over the next year,” he said. “When you’re a small-bay user, though, it’s a different story. There’s just virtually no available space on the market.”
National brokerage firm Colliers told a similar story in its latest market report, noting that much of the recent leasing activity was driven by tenants occupying less than 10,000 square feet of space.
“Despite continued strong demand from larger distribution and logistics tenants seeking to expand or enhance their space, only a few options for immediate occupancy are available until new projects are completed,” the company said in its report.
However, relief is on the way for big-bay tenants.
Colliers noted there are currently seven major projects in various stages of construction – three in the east end, three in the Kanata/far west submarket and one in Ottawa south – totalling more than 980,000 square feet, with most of those developments scheduled to be completed by the end of 2024.
The company said another 39 projects with a combined footprint of six million square feet are in the planning and pre-leasing stages. According to Colliers, Ottawa currently has about 46 million square feet of industrial space.
Colliers associate vice-president Daniel Niedra said submarkets such as Kanata that are “traditionally not very well-served by industrial real estate” are now buzzing with activity as developers look to satisfy surging demand for warehouse and manufacturing space.
He points to Montreal-based Rosefellow’s two-building project on Huntmar Drive that is slated to add 480,000 square feet of big bay, “state-of-the-art” inventory in the west end as a prime example.
“There are still (technology) companies here who are making things, and they need the floor space,” Niedra explained.
But as rising interest rates drive up financing costs and soaring inflation makes construction materials more expensive, Niedra says he wouldn’t be surprised if some developers pressed pause on new builds until economic conditions improve.
“I think they’re going to have to assess the risk of putting up a building on spec and having to take time for that space to be absorbed,” he said. “Tenants in this market are eager to get into modern, functional product. It just takes some time for leases to roll and tenants to find the right opportunities to relocate.”
Meanwhile, Colliers said there were few notable sales transactions in the third quarter.
“In the face of rising interest rates and economic uncertainty, real estate investors maintain a strong appetite for industrial assets,” the report noted. “Nevertheless, the limited availability of investment-grade properties in the current quarter has led to a predominance of sales involving users and smaller-scale buyers.”