Decreased rental prices suggest return to moderation despite low vacancy: report
The industrial market in the Greater Toronto Area (GTA) is moving towards a more moderate phase, with vacancy rates slowly rising and smaller quarter-over-quarter increases in average net asking rents, according to JLL’s latest Industrial Report for Toronto.
According to the report, the vacancy rate increased to 1.6 per cent, the highest level since the first quarter of 2021. All submarkets within the GTA had rates at or above 1.5 per cent during the quarter, ranging from 1.5 per cent in GTA North to 1.8 per cent in GTA Central. The average net asking rents rose to $18.69, showing a 15.2 per cent increase year-over-year and a minimal 0.80 per cent increase quarter-over-quarter. This slight increase contrasts with the 5.9 per cent jump seen between the second and third quarters of 2022, indicating that the era of high rental increases during the pandemic is ending.
Tenant demand resulted in 5.2 million square feet of major leasing activity, with the largest new lease being PepsiCo’s agreement with Orlando for 569,083 square feet in Milton. The report noted that this is a positive development after several months of uncertainty. The major leasing volumes in the third quarter decreased compared to the 6.0 million square feet observed in the second quarter. Additionally, quarterly investment volumes reached approximately $960.0 million, the lowest total since the fourth quarter of 2020, as interest rates returned the market to its pre-pandemic state. Both of these data points suggest that deals are taking longer to finalize.
Construction activity reached a substantial 21.8 million square feet, with 3.3 million square feet delivered during the quarter. The largest deliveries were from Pure Industrial’s developments at 10 Whybank (167,909 square feet) and 20 Whybank (458,496 square feet) in Brampton. Notably, both buildings were unleased, highlighting the current trend of decreasing pre-leased delivery rates across the GTA, which stood at 70.7 per cent in the third quarter, down from 75.6 per cent quarter-over-quarter and a significant decline from the 88.2 per cent reported in the third quarter of 2022. The quarter also saw the groundbreaking of Ivanhoé Cambridge’s 1.2 million square feet site at the Lakeridge Logistics Centre in Ajax, now the largest industrial development in the GTA. Landlords are largely continuing to divide both new and older properties to attract interest from the mid-bay industrial market.
According to the report, tenants will face a tight, yet gradually stabilizing market through 2024.
Delivered square footage is expected to continue to exceed total absorption as the GTA’s extensive construction pipeline reaches completion. Combined with decreasing pre-lease rates, tenants can anticipate quarter-over-quarter increases in vacancy and almost negligible rises in average net asking rents.