Introduction

High rents and low vacancy; another quarter for the Greater Toronto Hamilton Area (GTHA) industrial market. The continued high demand and insufficient supply that the industrial market has experienced for the past year persist as availability remained steady at 0.6%. The total available space across the GTHA is under 10 million square feet. While this quarter has seen a slight uptick in availability, in a market size of approximately 200 million square feet, this increase can be considered nominal. Available subleases have followed the same market trend, shrinking by nearly 70% over the past two years.

In Q3 2022, both tenants and landlords in the Office market continued to assess their position and goals in the post-pandemic environment amid increasing economic uncertainty. To combat inflation, the Bank of Canada increased the overnight lending rate over the course of the quarter in two significant jumps which brought the rate above the neutral range for the first time since 2007. In response to these changes, many industry professionals and decision-makers have taken a step back as they prepare to wait out a potential economic downturn. However, confidence in the office as a long-term tool for employee and organizational success endures. As of September, office occupancy in the Downtown core climbed to over 30%, a positive trend that is anticipated to further improve and is likely to be accompanied by increased office leasing activity.

Industrial & Land Market Outlook

Absorption increased relative to the last quarter, growing from 1.9 million square feet to 2.4 million square feet and maintaining the market trend of at least 1 million square feet of positive absorption every quarter for the last two years. As of Q3 of 2022, the year-to-date absorption number is 5.4 million square feet, which is similar to Q3 of 2020 at 5.3 million square feet. This relative similarity is an indicator that 2021, which produced record high absorption and market activity, may have been an outlier despite the overall heated industrial market.
2022 has seen a 22% surge in year-to-date average asking rent, up approximately $3.00 since the start of the year. The growth in net rental rates can be attributed to the lack of space that tenants need to meet their current requirements. In promising news, Q3 has seen the largest amount of quarterly new supply added to the GTHA market over the last four quarters at 1.5 million square feet. While it is an encouraging sign to see an increased level of new supply coming to GTHA, the market needs to continue to see development at this rate because there are a considerable number of active tenants ready to absorb the space.

While demand still exists in the investment market, we have seen a 7% decline in the number of sale transactions down from the previous quarter, suggesting a slight pullback from investors. This could result from a disconnect between buyers and sellers; sellers are looking to achieve rates similar to the start of 2022 while buyers want more of a price reduction due to rising interest rates. While user pricing is strong, certain parts of the GTHA are starting to soften depending on the asset. Functional buildings that include features such as good clear height, sufficient truck-level doors, and quality of shipping depth are holding their value.

Office & Retail Market Outlook

Overall availability went from 14.73% to 14.59% this quarter. However, across the region, some assets are seeing more activity than others. The demand for turnkey and model suite buildouts is heightened, with many exclusively considering options that will offer a seamless transition between locations, or simplicity when accommodating growth. The appeal of move-in ready space is amplified by the fact that many tenants have delayed real estate decisions throughout the pandemic, and now face looming expiries and a limited decision-making window.

Landlords have held rental rates firm throughout the pandemic and offered other incentives to drive leasing activity, including accessible rent terms, early occupancy, and tenant inducement allowances. However, discounts for quality space can still be found on the sublease market, most notably in A-Class space, where the average discount was found to be 13.0% in comparison to head lease rates on average. This discount is due to face rates increasing in A-Class assets over the course of the pandemic as quality space remains in higher demand, with 13.0% year-over-year (YoY) growth between Q3 2021 and Q3 2022. In the suburban submarkets, rental rates for all classes have been less dramatically affected, with minimal YoY growth recorded.