Demand for Warehouse Space Surges

As e-commerce and other online business portals and platforms grow in popularity, the demand for warehouse spaces continues to surge, with Canada and many of its major urban centres being the beneficiaries of this trend.

The Canadian commercial real estate market is witnessing substantial demand for warehouse spaces, resulting in higher prices.

Of course, there are various types of warehouse spaces that serve unique purposes and objectives.

Warehouse Spaces in Canada

Public and Private Warehouses

Public warehouses are typically available under short-term leases and are designed to help businesses see temporary distribution needs. Public warehouses often service multiple clients. Private warehouses usually operate under long-term contracts and have single tenants or are privately owned by the companies directly.

Distribution Centres

Distribution centres have been designed specifically to meet the needs of commerce and brick-and-mortar retailers; the goal of distribution centres is not to store products but to move them. Hence, products are only housed till they are shipped to their final destinations.

Climate-Controlled Warehouses

Finally, there are climate-controlled warehouses that store perishable products that cannot withstand temperature swings. These types of warehouses are used to store and distribute grocery items, flowers, and other products that require specific temperatures.

The Online Retail Environment

The COVID-19 public health crisis gave a significant boost to online retail. It is estimated that Canadians spent nearly $50 billion on online retail in 2020, and this figure remains elevated three years later. Industry data show that leasing activity surged to 15.3 million square feet in the fourth quarter of 2021. Toronto and Ottawa reported more than three million square feet of net absorption. National net absorption increased to a 10-year high of 51 million square feet.

This significant growth and demand for online shopping options have resulted in the need for even greater warehouse space and distribution centres. Statistics reveal that e-commerce companies represent nearly 40 per cent of industry property leases. Because of this increased demand, warehouse space has become a hot commodity, with companies looking for property to store their goods. In today’s commercial real estate environment, the national rate of industrial availability is below three per cent, the lowest in the country’s history.

Toronto, Vancouver, Montreal, London, and Waterloo are all reporting low availability rates.

But this does not mean the Canadian commercial real estate market does not have more room for growth, according to a panel of industry experts at the RealCapital conference at the Metro Toronto Convention Centre earlier this year.

“We still feel really good about development because we have the fundamentals,” said Prakash David, the CIO at investment real estate firm Triovest. “We think there are still good tenants out there and a lack of good space, notwithstanding a lot of new supply coming on in certain markets.”

Suffice it to say, the market has been undersupplied for more than a decade, so this lack of inventory is beginning to be realized.

But is the market responding?

It is estimated that more than 26 million square feet of logistics space is under construction in Montreal, Toronto, and Vancouver, and most of this space is already pre-leased. Businesses cannot find warehouse space fast enough to meet the bolstered demand for their goods.

Amazon acquired close to 830,000 square feet of space in Burnaby, British Columbia, and also leased 100,000 square feet in Ottawa’s Hawthorne Industrial Park. Fast fashion company SHEIN opened a 170,000-square-foot warehouse and office space in Markham, Ontario. Purolator plans to open new facilities in Toronto to process higher volumes of packages. Similarly, New York-based investment company Blackstone has spent more than $4 billion to scoop up warehouses and industrial real estate in Canada.

Warehouse Space Price Challenges

Demand for warehouse space and land facilities has resulted in an increase in rent and purchase prices.

As of 2021, the average sale price for an industrial property increased by 27.9 per cent year-over-year. London, Ontario, surpassed all other markets with close to double the asking price. Vancouver, Toronto, Ottawa, and Montreal all reported price hikes, as the average sales price was more than $200 a square foot.

Rents for industrial space in Ottawa are also climbing steadily, and it continues to be a hot market with an average sale price of $300.88 per square foot. Nearly 300,00 square feet of new inventory was offered in 2022, and 414,000 square feet are under construction.

Changes in Commercial Real Estate

According to the 38-nation Organisation for Economic Co-operation and Development (OECD), Canada has one of the top three largest real estate bubbles among its member countries, with a significant increase in demand for industrial space.

Data suggest that demand for industrial and warehouse property near the nation’s capital continues to grow. It is the chief destination of choice for e-commerce and logistic leaders, such as Amazon and FedEx. The primary reason for attraction to this region is its close proximity to Montreal and Toronto markets.

As noted, the evolution in e-commerce activity has climbed, particularly for the growing demand for storing food and other consumer goods. With more of these companies planning to offer more goods and services and committing to fast delivery times, industrial real estate demand can only go higher. Other businesses are trying to re-establish their customer base and strengthen their supply chain.

Short-term forecasts contend that demand for warehouse space will continue to outrun supply. That is why many companies are repurposing existing space or are obtaining retail spaces that have shut down to store their goods. Businesses are hiring people to handle their logistic issues better and squeeze out more space more efficiently to meet their storage needs. Warehouses are also getting taller, allowing companies to fit more products and improve cubic efficiency.

Businesses have been forced to look for warehouse space far from their headquarters and manufacturing facilities simply because they cannot find the space in their region. As this robust demand persists, rent and purchase prices are unlikely to drop, and pre-leasing new spaces is likely to be a consistent feature in the commercial real estate market.