The rumours of the Canadian industrial real estate market’s death have been greatly exaggerated.

Despite sluggishness in the broader economy, Canada’s commercial real estate sector has been recording exceptional growth and has even outperformed other asset classes amid a rising-rate environment. Market analysts contend that the industry has become a hotbed for investors searching for strong, stable, and lucrative opportunities. This explains why all commercial real estate markets are reporting robust sales and leasing activity.

But what makes the industrial real estate space fascinating to monitor in Canada is how the boom has extended beyond the provincial borders of British Columbia and Ontario.

Contributing to this trend has been the growth in property and lease values. This has prompted investors and end users in the two most populous provinces in the country to search for more affordable distribution and warehousing facilities in other provinces. As a result, a spillover effect has been bolstering demand in several different and crucial Canadian commercial real estate markets, such as Calgary, Edmonton, Regina, Saskatoon, Halifax, and St. John’s.

Although demand has weakened a bit since hitting a peak in 2022, industry data confirm that inventory volumes have diminished and remain low due to the industry’s vast array of headwinds, from rising interest rates to a slowing national economy.

Low vacancy levels have also been ubiquitous so far this year. The country’s national office vacancy rate was estimated to hit a record high in the first quarter, with Toronto, Montreal, Ottawa, and Vancouver touching double digits.

Indeed, industrial real estate supply has failed to keep up with demand, with market experts alluding to zoning restrictions, growing construction costs, and scarce land availability. Industry observers note that demand has been seen in various sectors throughout the national economy, from logistics and technology to manufacturing and e-commerce.

State of the Canadian Economy

A broad array of sectors, including manufacturing, has started showing signs of slowing down.

In April, manufacturing sales slipped 0.2 percent, according to Statistics Canada. The Richard Ivey School of Business’s Purchasing Managers’ Index (PMI) fell for the third straight month in April, weakening to 53.5. The S&P Global Manufacturing PMI slipped into contraction territory, falling to 49 in May.

“A weak underlying demand profile weighed on the Canadian manufacturing sector during May, with production dropping since April and purchasing activity cut. The latter has had some further positive impact on supply chains, and with the challenges related to the pandemic now principally unwound, lead times improved for the first time in nearly four years,” said Paul Smith, the economics director at S&P Global Market Intelligence, in a report.

“Better component availability helped to push down on input costs, which were down slightly in May and marking a noticeable turnaround from the elevated increases we’ve seen over the past three years. Whilst there remain some residual output price increases still being recorded in the sector, it feels that inflation challenges in manufacturing are now coming to an end.”

The good news? The Canadian Federation of Independent Business’ (CFIB) Business Barometer – a long-term index of market conditions – expanded for the sixth straight month in May, topping 56. There was optimism in most of the surveyed sectors.

The other piece of good news for the commercial real estate market is how resilient the retail industry has been in today’s economic landscape, even as online sales continue to grow. Most retail centres in the Canadian commercial real estate market show solid activity, encouraging investors and landlords to begin investing heavily in shopping malls across the country.

Despite a challenging economic environment, many positive trends are popping up throughout the commercial real estate market.

“Although activity has come off peak levels reported in the first quarter of 2022, demand for commercial real estate remains relatively healthy in most major centres. Several markets experienced strong activity in the first quarter, despite challenging market conditions,” said Christopher Alexander, the president of RE/MAX Canada, in a statement.

What Does the Future Hold for Commercial Real Estate?

Canada’s industrial real estate market is poised for a promising future driven by several crucial components.

First, the post-pandemic growth and stability of the country provide a solid foundation for commercial real estate investments. Second, urbanization trends and population growth in major cities and rural areas are expected to fuel greater demand for office spaces, retail centres, and even mixed-use developments. Finally, the rise of remote work and flexible office arrangements may reshape the commercial office landscape, transforming conventional office spaces into collaborative, flexible, and amenity-rich environments.

Sustainability could also play a massive role in the national commercial real estate sector, with many companies and investors putting money toward energy-efficient buildings.

Ultimately, the future of commercial real estate in Canada consists of immense potential for growth, innovation, and sustainability.

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