The amount of vacant industrial space in Ottawa rose at the end of 2023, two major brokerages reported this week – but experts say most of the uptick was due to the completion of large-scale projects that will do little to alleviate the flood of demand for small-bay properties.
Ottawa’s industrial availability rate – the percentage of space that is actually available for lease – rose to 2.6 per cent in the fourth quarter, CBRE said in its latest national market report, up from 2.2 per cent in the previous quarter.
Meanwhile, Colliers pegged Ottawa’s industrial vacancy rate at two per cent at the end of December – a major jump from 1.2 per cent in the third quarter.
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Both companies explained that the increase was the result of significant new supply being added to the city’s inventory in the waning months of 2023, much of it yet to be leased.
Colliers said Ottawa experienced net negative absorption of more than 166,000 square feet over the final three months of 2023, largely due to the completion of Manulife’s two new buildings at 2101 and 2105 Bantree St. in the south end.
The project added about 203,000 square feet of new space to Ottawa’s supply of industrial space, of which roughly 53,000 square feet has been pre-leased.
“This uptick in vacancy does not indicate a market softening but rather the outcome of a necessary infusion of new supply,” Colliers said in its report.
Warren Wilkinson, the senior managing director of Colliers’ Ottawa office, said that rather than being a cause for concern, the hike in Ottawa’s vacancy rate should be seen as a sign of progress.
“The reality is that softening is the direct result of new inventory hitting the market, which is what we’ve been talking about we’ve been desperately needing for years,” Wilkinson said, noting local brokers continue to see “significant activity” in the industrial leasing sector.
Louis Karam, managing director of CBRE’s Ottawa office, agreed.
“With record new supply that’s coming in, not all of it is pre-leased,” he noted. “It’s normal to see an uptick in availability. We’ll see in 2024 if (the market) starts softening a little bit, especially with the new supply coming in. But I’m not expecting anything to drop off a cliff in 2024.”
Indeed, Ottawa remains one of the tightest industrial markets in the entire country.
Its availability rate was the fourth-lowest among all major Canadian cities in the fourth quarter, behind only London, Ont., Halifax and Winnipeg. Ottawa’s 13.3 per cent year-over-year increase in rental rates was the second-highest after the Waterloo Region.
Experts say that’s partly a reflection of Ottawa’s chronically undersized industrial sector. The National Capital Region still lags far behind other similarly sized Canadian cities in its overall volume of industrial space.
That shortage is starting to be addressed with a spate of new construction projects that are now underway and expected to add about 1.2 million square feet of new inventory upon completion, according to Colliers.
But both Karam and Wilkinson say developers remain focused on larger projects rather than the small-bay facilities many tenants are desperately looking for.
“Small bay, I still consider it that there’s almost no vacancy in the city,” Karam said. “There’s a lot of demand for it, not a lot of supply and zero new construction.”
Wilkinson echoed that assessment, noting small-bay customers remain the driving force behind Ottawa’s surging industrial market despite the capital’s recent emergence as an e-commerce distribution hub.
“It’s still a market that thrives on that seven- to 12,000-square-foot (space),” he said. “We’ve built the large bay, and the small bay still continues to dominate (demand).”
Colliers’ research shows that another 41 industrial projects totalling an additional 5.6 million square feet are in the planning and pre-leasing stages of development, meaning relief could be on the horizon.
But Wilkinson said he expects Ottawa to remain a “landlord’s market” for the foreseeable future.
“It’s just becoming a little bit healthier for both sides,” he added. “It’s going to be this way when we start adding large tracts of space.”
Both rise in industrial vacancies comes as Ottawa’s beleaguered office market showed signs of a slight recovery in the fourth quarter.
According to Colliers, the capital’s office vacancy rate fell to 12.2 per cent in the final quarter of 2023, down nearly half a percentage point from the previous three-month period thanks to positive net absorption of nearly 340,000 square feet.
CBRE’s overall vacancy number for Ottawa was slightly higher at 13.3 per cent, but it too was down from 13.6 per cent in the third quarter.
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