Ottawa’s inventory of vacant industrial space is “dangerously low,” a new report from Colliers says – prompting the head of the firm’s local office to warn that large-scale tenants could start looking at properties elsewhere to address rising demand for warehousing and storage facilities.
The capital’s industrial availability rate – that is, the total amount of space available directly from landlords and via sublease – ticked up slightly from 1.2 per cent to 1.3 per cent in the second quarter, Colliers said in its latest Ottawa industrial market report this week.
But that’s still more than a full percentage point below the rate from a year ago and just off the city’s record-low level from the first quarter.
The space crunch has pushed rents ever higher as prospective tenants have few options but to pay what landlords are asking in an overheated market. The average asking net rent at Ottawa industrial properties rose 80 cents from the previous quarter to $13.27 a square foot – a 13.3 per cent hike from a year earlier.
After decades of relative stability, demand for space in Ottawa’s industrial real estate market skyrocketed during the pandemic as the National Capital Region suddenly became the place to be for e-commerce distributors such as Amazon that were looking for easy access to 400-series highways to quickly and cheaply transport goods to online buyers in Toronto, Montreal and other large hubs.
Soaring construction costs
But while Broccolini built two mammoth fulfilment centres for Amazon in Barrhaven and on Boundary Road, soaring construction costs and a lack of industrial-zoned development land, as well as rising development fees and other roadblocks, have hamstrung efforts to further add to the region’s supply, says Warren Wilkinson, the managing director of Colliers’ Ottawa office.
Projects like Avenue31’s one-million-square-foot business park now under construction near the corner of Hunt Club Road and Highway 417 are few and far between, Wilkinson notes. And he worries that might force other e-commerce companies that have been eyeing the Ottawa market to look south to markets such as Cornwall and other communities along the St. Lawrence Seaway to meet their growing need for warehouse space.
"If we don’t have the size in order to accommodate large industrial users, they’re going to look elsewhere."
“If we don’t have the size in order to accommodate large industrial users, they’re going to look elsewhere,” Wilkinson says. “If we don’t start adding supply and builders don’t start building in relatively short order … that’s the threat. That could happen.”
Avenue31 recently completed the first phase of its business park, a 146,000-square-foot building that was 76 per cent pre-leased to three tenants.
But that was the only new industrial space to come online in the second quarter, and it doesn’t come remotely close to addressing the shortage, Wilkinson says.
Even the additional 584,000 square feet of warehousing and storage space now under construction and the 3.6 million square feet of new facilities in the development pipeline won’t solve the problem, he adds.
“That’s not enough,” Wilkinson says. “Even if we put three million square feet up, there won’t be (enough space).”
Local tenants taking hit
Veteran Ottawa commercial real estate broker Michael Church says a lack of major warehouses is a definite stumbling block if the city wishes to attract more Amazon-style e-commerce behemoths.
But he argues that the smaller tenants that are the lifeblood of many industrial parks – think carpet wholesalers, HVAC suppliers and the like – are taking the hardest hit as inventory plummets and rents soar.
“Tenants are coming up saying, ‘What do you mean, $12 (a square foot)? I can’t pay that,’” says Church, the managing director of brokerage firm Avison Young’s Ottawa office. “If you don’t pay it, the guy standing behind you will. There isn’t any product, and it’s incredibly expensive to build.”
He says tenants whose customer bases are rooted in the capital have no choice but to absorb the rising costs.
“Guys doing service work in Ottawa, they’re going to stay here,” Church says. “It’s where your market is. Unless you’re a distributor – unless you’re a supply-chain logistics guy – you’re going to stay here. We’re just going to have to deal with it.”
“For that local user, what do they do?” he says. “There’s really nowhere for them to go. They can’t go to Cornwall if they’re a local … group. It’s very exciting that industrial (space) is now at the forefront of commercial real estate in Ottawa, because for the first 15 years of my career, it wasn’t. But that comes at a cost.”
Wilkinson wonders if landlords might try to ease the pain for tenants by shortening leases to four- or five-year terms with built-in annual rent increases rather than locking tenants into 10-year deals at a fixed rate, as has traditionally been the case.
“You’re boiling the frog,” he explains. Now you’re not going from 16 (dollars a square foot) to 20 (in one leap).”
Church, meanwhile, questions how much higher rents can go before it’s no longer economically viable for tenants to occupy industrial space.
“It’ll be interesting to see how long it takes before prices level,” he says. “Industrial prices can’t continue to keep going like they are. It just doesn’t make any sense.”