According to CBRE’s Industrial MarketView Q4 2014, after a record high level of construction activity in 2014, Canada’s industrial market saw the addition of 6.9 million square feet of new supply in Q4 2014 – the largest amount of quarterly new supply since Q3 2008. New supply in Q4 2014 climbed 78.1 per cent quarter-over-quarter and was 58.2 per cent higher than the 10-year quarterly average. Toronto and Edmonton experienced the largest amount of new supply at 3.4 million square feet and 1.4 million square feet, respectively. The trend towards design-build developments continues, with such projects accounting for 48.4 per cent of total new supply.
National availability and vacancy rates both rose 20 bps quarter-over-quarter in Q4 2014 to 5.5 per cent and 3.7 per cent, respectively. The influx of new supply helped to alleviate pent-up demand in many of Canada’s industrial markets.
Target’s decision to exit Canada will result in a significant amount of industrial space becoming available in 2015 – 1.7 million square feet in Calgary, 1.4 million square feet in Cornwall, and 1.3 million square feet in Milton. In Calgary, Target’s space represents 30 per cent of the total construction activity; as a result, it is expected that planned development in this market will slow temporarily. Target is currently selling its distribution facilities, and the impact of these sales on each market depends on whether the buyer is an investor or owner-occupier.
Construction activity continued its climb in Q4 2014, reaching a new all-time high of 19.5 million square feet Western Canada’s industrial markets continue to punch above their weight, with 51.4 per cent of national construction occurring in Vancouver, Calgary, Edmonton and Winnipeg despite these markets accounting for only 28.5 per cent of national inventory. Recent declines in the price of oil should pose little threat to industrial markets in the West in the short to medium term, since new supply can be shut off relatively quickly if needed.
There was 3.4 million square feet of net absorption in Q4 2014, down from 4.5 million square feet last quarter and below the 10-year quarterly average of 3.7 million square feet. On an annual basis, there was 17.8 million square feet of net absorption in 2014, down from 21.2 million square feet in 2013. The West accounted for 63.8 per cent of total net absorption in Q4 2014, despite only comprising 28.4 per cent of the national inventory.
In general, despite solid industrial market fundamentals in 2014 and the tailwind provided by low interest rates, industrial REITs in Canada experienced flat or decreasing share prices. Dream Industrial REIT ended Q4 2014 with a price of $8.42 per share, down 7.0 per cent quarter-over-quarter, even though occupancy for the portfolio increased from 95.4 per cent in Q3 2014 to 96.0 per cent in Q4 2014. The share price of Summit Industrial Income REIT decreased 3.3 per cent quarter-over-quarter to $5.78 in Q4 2014. Funds from operations (FFO) per unit was negatively impacted by the REIT’s deleveraging and transaction timing. Pure Industrial REIT (PIRET) ended Q4 2014 with a share price of $4.44, up slightly from $4.43 in Q3 2014. PIRET acquired 60 acres of development land in Vaughan in a 50/50 joint venture for approximately $45.0 million in Q4 2014.
The transportation and warehousing sector continues to gain an increasing share of total industrial employment within Canada. At year-end 2014, this share was 34.0 per cent, compared to 26.9 per cent in 2005. Employment in Canada’s manufacturing sector has dropped 19.7 per cent since 2005. It is expected that the lower Canadian dollar, now fluctuating around $0.80 USD, will help strengthen the nation’s ailing manufacturing sector; however, it is unclear how long it will take for the lower Canadian dollar to have a significant impact on the manufacturing sector and whether this sector’s long-term decline can be reversed.
Manufacturing sales reached $52.4 billion in 2014, which is up 5.2 per cent from 2013. Unfilled orders in 2014 increased by 22.0 per cent year-over-year to $91.2 billion – an indication that sales are set to remain stable. Total inventory grew 1.6 per cent year-over-year to $70.0 billion. A modestly rising level of inventory is a key indicator of healthy demand for industrial real estate.