Q1 | 2009 C OL L I E R S I N T E RNATIONAL | INDUSTRIAL MARKET
Canadian
Snapshot Overall available space throughout Canada’s industrial markets is on the rise as demand softens and the tail end of new supply is delivered into various markets. Asking rental rates are counter-intuitively lagging the cycle, and have held at an average of $6.10 during the first quarter of 2009. Average asking rates were supported by Canada’s western cities where the downturn has hit slightly later, and markets are coming out of a period of very high demand as supply struggles to keep pace. Canada’s western
- Adding to the turbulence in the East is the auto industry crisis that is rippling through the supply chain, and impacting the industrial market in Ontario cities all currently sit with vacancy rates at or below 4.5% - still a landlord favoured position - tempered by the economic outlook and demand projections. In comparison, Canada’s eastern markets such as
Toronto and Montreal have availability rates north of 6.4%, progressing upward. It is anticipated that the national average asking rents will begin to move downward as the year progresses, and the western markets will adjust to the new demand and economic environment. Commodity prices are projected to remain subdued for 2009, and will begin a moderate recovery going forward which should help drive demand in the western markets in 2010 and 2011. In contrast, Canada’s eastern markets tend to follow import volumes more closely, as markets are heavily weighted to distribution and warehousing uses. Adding to the turbulence in the East is the auto industry crisis that is rippling through the supply chain, and impacting the industrial market in Ontario. The mitigating factor in the industrial property market is the short development cycle, which has allowed for a better balance of supply and demand during recent years. With new supply taps shut, the Canadian market will work to digest the currently available space, and is expected to be poised for a return to a more solid position in the medium term.
WAREHOUSE SPACE - RENT & AVAILABLE SPACE $10.00
7.0%
$9.00
6.0%
Market Indicators
Availability Rate 5.8% Net Asking Rent $6.10
Top 5 Net Rent
Saskatoon $9.00 Edmonton $8.00 Vancouver $7.25 Calgary
$6.75
Toronto
$5.70
Montreal
$5.50
Top 5
Vacancy Rate
$8.00
Vancouver 2.6%
4.0%
Edmonton 3.8%
$7.00 3.0% $6.00
2.0%
$5.00
1.0% 0.0%
$4.00 2006
2007 Net Rent
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2008 Available Space
2009 YTD
Saskatoon 2.2%
5.0%
Calgary
4.5%
Toronto
6.4%
Montreal
7.3%
Vancouver Market activity for income properties throughout Vancouver has been relatively quiet, largely due to uncertainty created by the U.S. meltdown, and a slowing of the economy in Canada. With so much uncertainty, financial institutions have pulled back and greatly reduced the amount of equity in the market available for real estate investment. Purchasers left in the market are highly sophisticated and cautious, and now have the opportunity to scrutinize potential purchase opportunities in greater detail due to the lack of competition they face from other investors. A significant trend in Q1 has been the urgency displayed by landlords to retain tenants.
WAREHOUSE SPACE - RENT & AVAILABLE SPACE $10.00
5.00%
$8.00
4.00%
$6.00
3.00%
$4.00
2.00%
$2.00
1.00%
0.00%
$0.00 2006
2007
2008
2009 YTD
With vacancy on the rise, and an uncertain Net Rent Available Space economic future, landlords are attempting to lock-in tenants in order to secure cash flow over the foreseeable future. This trend has had a softening effect on lease rates, as tenants - also concerned about future cash flow - are unwilling to lock-in without some form of concession.
Calgary The largest impact on increasing vacancy levels throughout the Calgary market is construction coming to completion without tenants in place. These new buildings are considered vacant inventory, which is a trend we also saw in the third and fourth quarters of 2008. With limited leasing activity on new construction, and a current excess supply of such inventory, developers continue to keep planned projects on hold, often with development and building permits in place.
WAREHOUSE SPACE - RENT & AVAILABLE SPACE $10.00
8.00% 7.00%
$8.00
$6.00
6.00% 5.00% 4.00%
$4.00
3.00% 2.00%
Activity on renewals in Calgary’s industrial $2.00 market have been strong, and in order 1.00% to stabilize capital expenditures during $0.00 0.00% this economic recession, some users are 2006 2007 2008 2009 YTD choosing to forego expanding into larger Net Rent Available Space spaces and are opting to continue operating out of their current locations. This negates the costs of moving, and a possible increase in annual rental payments. With more viable options now available to most users, landlords have become quite aggressive in securing renewals with existing tenants in order to limit portfolio vacancy. This has caused a downward pressure on both expected and actual rental rates on older product in Calgary, thus making higher expected rates on new developments more difficult to achieve. In addition, Calgary landlords are beginning to offer more unique and flexible lease incentives and terms, seen in previous years in order to remain competitive.
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Edmonton Oil and gas continue to drive the Edmonton industrial market, as well as user demand. As world economies find stability and begin to recover, a return of greater demand for oil and gas is anticipated. In this market, overall vacancy rates in Edmonton which remain under 4%, are still among the lowest in Canada, and are below the level at which many consider the market to be in balance. However, it does seem clear that the rising vacancy trend may soon bring the recent landlord’s market to an end. Edmonton rents have continued to climb, despite prevailing economic conditions, likely attributable to the fact that overall availability remains low and that asking rents tend to lag availability conditions through the market cycle.
WAREHOUSE SPACE - RENT & AVAILABLE SPACE $14.00
7.00%
$12.00
6.00%
$10.00
5.00%
$8.00
4.00%
$6.00
3.00%
$4.00
2.00%
$2.00
1.00%
$0.00
0.00% 2006
2007 Net Rent
2008
2009 YTD
Available Space
The bulk of the available space in Edmonton is now newer, highly functional space that is skewing the average rates to the high end of the spectrum.
Saskatoon In 2008, Saskatoon’s industrial availability rose slightly, mainly due to the return of speculative constructions, however it remained low at 2.40% at the end of 2008, and remains stable at 2.15% at the end of Q1 2009. Approximately 500,000 square feet of industrial space was added to Saskatoon’s inventory, and rental rates throughout the city have increased mainly due to higher construction costs and a low availability rate. Availability is currently climbing upwards of $12 per square foot for new construction, with existing inventories following at $7 to $10 per square foot. Serviced industrial land remains in high demand, with prices falling within the range of $295,000 to $335,000 per serviced acre.
WAREHOUSE SPACE - RENT & AVAILABLE SPACE 6.00%
$10.00
5.00%
$8.00
4.00% $6.00 3.00% $4.00 2.00% $2.00
1.00%
$0.00
0.00% 2006
2007 Net Rent
2008 Available Space
2009 YTD
Saskatoon’s forecast for 2009 suggests that demand for space will remain high, and that the pace of construction will slow in comparison to 2008. There appears to be a sufficient supply of industrial land on the market in Saskatoon and prices are anticipated to stabilize around $300,000 per acre mark.
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Toronto Industrial activity has slowed notably during Q1 2009 in the Greater Toronto Area (GTA). Land sales are most significantly impacted, with building sales following the overall trend. Leasing activity is also showing signs of a pullback in demand, with negative absorption of 3.6 million square feet during the first quarter of the year. GTA’s heavy reliance on distribution and warehousing is projected to continue until import and export activity increases, an indicator closely related to the health and behavior of U.S. and Canadian consumers.
WAREHOUSE SPACE - RENT & AVAILABLE SPACE $10.00
8.00%
$9.00
7.00% 6.00%
$8.00
5.00% $7.00 4.00% $6.00 3.00% $5.00
2.00%
$4.00 1.00% GTA’s availability rate has moved upwards almost 100 basis points with a related 0.00% $3.00 softening of asking rents of approximately 2006 2007 2008 2009 YTD 5%. New construction levels will be Net Rent Available Space reduced during 2009 and 2010, allowing the market to re-balance to a new demand environment, and without an oversupply issue Toronto’s leasing market is expected to regain its footing as the North American economy begins a recovery.
Montreal In the first quarter of 2009, the results of the Montreal industrial market confirm that demand for space is slowing as only 25,000 square feet were absorbed this quarter, and the vacancy rate jumped almost 50 basis points. Of this, space with a ceiling height of less than 24 feet accounted for a vacancy rate of 4.50%, and those with a minimum 24 feet have a vacancy rate of 2.80%. However, without the addition of inventory that the Canadian Tire distribution center contributes, there would have been a negative absorption of close to 1,600,000 square feet this quarter.
WAREHOUSE SPACE - RENT & AVAILABLE SPACE $8.00
$6.00
10.00%
8.00%
6.00% $4.00 4.00% $2.00
2.00%
$0.00 0.00% As a consequence of the changing nature 2006 2007 2008 2009 YTD of Montreal’s industrial market from Net Rent Available Space manufacturing to distribution, many older spaces are generally difficult to adapt and may be seen as obsolete. As such, over the course of 2009 we will see more and more large spaces become available, while smaller more functional spaces of 2,000 to 25,000 square feet will continue to be in demand. Montreal’s vacancy rate will continue to rise due to the economic situation, and the arrival of a number of new buildings, where construction is expected to be primarily built-to-suit. In Q1, a total of 2,500,000 square feet was delivered of which1,800,000 square feet is categorized as built-to-suit projects.
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Colliers International represents property investors, developers and occupiers in local, national and global markets. Colliers International offers a full range of property solutions: Brokerage Services Commercial Leasing Corporate Services
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$2 billion in annual revenue 868 million square feet under management 11,000 professionals 293 offices in 61 countries Ian MacCulloch Vice President, Research | Canada
T: 416.643.3708 E: ian.macculloch@colliers.com
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To view this report online, visit: www.colliers.com This report and other research materials may be found on our website at www.colliers.com. The information contained in this report was provided by sources deemed to be reliable, however, no guarantee is made as to the accuracy or reliability. As new, corrected or updated information is obtained, it is incorporated into both current and historical data, which may invalidate comparison to previously issued reports. Colliers Macaulay Nicolls (Ontario) Inc., Brokerage © 2009 is an owner member of Colliers International, a worldwide real estate partnership with offices in the Americas, Europe, Asia, Australia and Africa.