The Greater Toronto Area’s industrial real estate sector, with a 0.9% vacancy rate, is one of the tightest markets in North America, according to a new report.

Analysis from Avison Young notes the region’s vacancy rate has been sideways since the last quarter of 2021, but has declined rapidly over the short term, coming in at 7.1% as early as Q1-2010, signifying voracious appetite from industrial tenants. Logistics and distribution firms, in particular, have been the largest occupants of industrial spaces with at least 10,000 sq. ft -- according to the report, 31% of users over the past five quarters are in the sector, followed by 20% in manufacturing, and 18% in retail and e-commerce. Unsurprisingly, investors have been especially active in the sector, 51% of which are private, while 20% are institutional, and 17% are owner-occupiers.

Industrial Rents on the Rise Due to Tight Supply

Avison Young noted that severely constricted supply relative to elevated demand caused rents to increase by 16% to $13.65 per sq. ft in Q1 from the fourth quarter of last year. That growth, while significant, is nothing compared to rents rising by 104% during the last five years alone, the report said. Rents are also offsetting high land costs.

READ: GTA Industrial Land Costs Have Almost Doubled in 18 Months

In Q1, there were 11 new building completions, totalling 1.8M sq. ft, while 16M more across 76 buildings was under construction at the conclusion of the quarter, of which 48% is pre-leased. However, the new construction only comprises 1.8% of the GTA’s total industrial stock. There are also 145 buildings comprising 51M sq. ft of industrial space in pre-construction across the metro region, with 63% concentrated in the GTA West.

Toronto is the GTA’s Most Coveted Destination

Rents in Toronto averaged $16.46 per sq. ft last quarter, the highest in the Central GTA, while Scarborough, despite having a 0.4% vacancy rate, had the most tenant-friendly rents at $10.55 per sq. ft. On a quarterly basis, vacancy in the Central market was flat at 0.8% in Q1, however, compared to the first quarter of 2021 it declined by 80 basis points. Etobicoke’s vacancy rate was slightly higher at 1.3% last quarter.

The Central GTA’s average asking net rental rate rose to $13.02 per sq. ft in Q1, surging by 40% year-over-year, by 76% over the last three years, and by an astounding 141% over the last five years.

Although there were no new completions in the Central GTA last quarter, 15 buildings carrying 2.8M sq. ft are under construction, 39% of which is already leased. Fifty-eight percent of the Central market’s new construction is located in Etobicoke and 37% is in Scarborough, while just 5% is in North York.

GTA East Has Low Vacancy, Cheaper Rent

The eastern portion of the GTA had a vacancy rate of 0.5% in Q1, down 10 basis points from the previous quarter, as rent rose to $10.96 per sq. ft, a 48% year-over-year increase -- rents have also grown by 97% in the last half decade. Avison Young’s report said the GTA East has among the region’s cheapest industrial rents.

The industrial market is growing in the GTA East, with two major companies, FGB Brands and HiTech Bay, moving in. The former, which just bought Weston Foods, will be acquiring 149 acres of a manufacturing campus and will create 1,200 new jobs, while the latter is moving to Pickering’s Innovation Corridor from Scarborough.

Availability in GTA North Tightens

The vacancy rate declined by 10 basis points to 0.6% in Q1, as the GTA North continues commanding the region’s highest industrial. At $14.24 per sq. ft, the average asking net rental rate is 4.4% above the GTA average, as it increased by 26% year over year and by 107% in the last five years. Rents range from an average of $12.89 per sq. ft in Aurora to $15.79 per sq. ft in Richmond Hill, Avison Young reported.

Three buildings with about 193,200 sq. ft were completed last quarter, while 22 more comprising 4.1M sq. ft were under construction at the beginning of Q2. Thirty more buildings, which will eventually provide nearly 10M sq. ft of additional space, were also in pre-construction. A massive 1M sq. ft logistics and distribution centre is also being built at Highway 404 and East Gwillimbury.

GTA West Vacancy Rate Fell to 1% in Q1

Availability dropped by 10 basis points from the fourth quarter of last year and by 0.60% from Q1-2021. The average asking net rent in the GTA West increased by 43% year over year to $13.85 per sq. ft -- which is 105% higher than it was in Q1-2017.

There were eight building deliveries during the first quarter, which provided the market with 1.7M sq. ft of new space, including a 457,000 sq. ft distribution centre in Milton. Moreover, of 7.4M sq. ft across 31 buildings under construction last quarter, of which 3M sq. ft is in Mississauga, 47% is pre-leased.

The Avison Young report also said Bolton has become a popular destination for industrial users, prompting Oxford Properties to invest $210M in a 65-acre industrial property in Caledon.

GTA Industrial Investment Declined in Q1

Although there was still $1.6B of investment in the GTA in Q1, it declined by 30% quarter over quarter. Despite the decrease, activity was still frenetic, increasing by 10% year over year, thanks to robust leasing market fundamentals. While investor activity in the industrial sector doesn’t appear to be waning, they nevertheless began putting their money in other asset classes last quarter.

There was $538M of industrial sales in the City of Toronto last quarter, followed by Peel Region with $449M. The average cap rate for single-tenant properties was flat on a quarterly basis at 3.8%, but decreased by 0.30% from Q1-2021, while multi-tenant property cap rates, at 4%, saw no change from Q4-2021 but dropped by 30 basis points year over year.