Industrial Vacancy Resumes its Upward Trend
In its December 2024 Labour Force Survey, Statistics Canada reported
employment rose by 91,000 from last month as the unemployment rate declined
by 10 basis points (bps) to 6.7%. Employment levels in sectors that are the
most closely linked with occupying industrial space have varied over the course
of 2024. The transportation & warehousing sector however witnessed strong
employment growth in December, rising by 17,000 in comparison to last month.
Although the overall Canadian industrial vacancy rate was showing some initial
signs of stabilization in Q3 2024, that did not occur in Q4 2024 as the vacancy
rate rose 70 basis points (bps) quarter-over-quarter (QOQ) to reach 4.8%. This
represents the steepest QOQ climb since vacancy began to notably trend
upwards in the latter half of 2023. This rise in vacancy from last quarter was
mirrored throughout all the major markets in the fourth quarter, with QOQ
vacancy increases ranging from 60 to 70 bps.
With the increase in the vacancy rate came the arrival of new vacant space on
the market; which climbed by approximately 13.0 million square feet (msf)
compared to last quarter’s totals. This is more than double the amount of new
vacancy that arrived on the market between the second and third quarters of
this year. What likely played a key role in the amount of new vacancy that
arrived on the market was the vacant space located within the new supply that
was delivered in Q4 2024. Of the close to 13.2 msf that was delivered to the
market this quarter as new supply, approximately 7.7 msf of that overall total
came on the market as new vacancy. The amount of sublet vacancy on the
market also resumed its upward trend after a momentary pause last quarter and
now sits at 11.8 msf. This represents an increase of 65.5% from the amount of
sublet vacancy on the market in Q4 2023. Sublet vacancy will likely continue to
climb through the first half of 2025 as occupiers continue to adjust their space
requirements in the face of a cooling labour market and economic uncertainty.
In addition to this only approximately 180k square feet of sublease vacancy has
lease terms set to expire in the first half of 2025.
Despite the notable rise in the amount of vacant space on the market, absorption
levels remained in positive territory this quarter reaching close to 655k sf. This
brought the overall annual total to close to negative 2.9 msf. Although three out of the
four quarters of the year witnessed positive absorption, it was the strong negative
absorption of 5.5 msf in the second quarter that led to the overall 2024 figure being in
the negative. All of the major markets had varied levels of absorption not only this
quarter, but throughout 2024. This was likely the result of a combination of factors but
in part was driven not only by the arrival of new supply, but also the occupancy of this
new supply as well as occupancy of space by a tenant that leased the space in a
prior quarter. Out of all the major markets Montreal has witnessed some of the most
substantial softening this year with high negative absorption throughout 2024. While
Montreal did have 3.4 msf of new supply arrive to the market in 2024, a new annual
record, these properties delivered only 31% preleased which therefore did not provide
much of a boost to absorption levels.
Leasing activity had a strong finish to 2024 with an overall total of 12.3 msf, similar to what was posted last quarter. This brought the annual total to 45.4 msf - only 100k sf
lower than the annual total in 2023. The being said the number of new leasing
transactions in 2024 was higher in comparison to 2023, specifically for deals under
125k sf, with a continued slowdown in transactions over 125k sf. In 2023 there were
66 new leasing transactions over that square footage threshold in comparison to 45 in
2024, with the majority of the activity with these larger transactions occurring in the
second half of 2024.
As discussed, new supply arrivals reached 13.2 msf this quarter, close to double the
square footage that was delivered last quarter and is the highest quarterly total of the
year. This brought the annual 2024 total to close to 35.5 msf, just surpassing last
year’s total and setting a new annual record. Toronto led the way at 14.4 msf delivered in 2024, followed by Calgary and Vancouver. The amount of square footage
under construction has slowed substantially and currently sits at 23.4 msf, down from
40.1 msf at the end of 2023. For the major markets alone the total square footage
under construction is approximately 19.6 msf and as currently 65% of this square
footage has yet to be preleased, the delivery of these projects will continue to impact
vacancy and absorption levels.
The overall asking average net asking rental rate continued to ease downward to
reach $15.81 per square foot, approximately 6.0% lower than the rate at the end of
Q4 2023. The majority of the major markets witnessed year-over-year decreases as
well with Toronto posting the largest decline at 6.0%.
