Industrial vacancy in greater Toronto has dropped to 3% as tenants grab more space and developers build less.

During the first quarter, decisions by industrial space occupiers to expand, relocate and consolidate pushed vacancy down 30 basis points from the fourth quarter of last year, according to Avison Young’s Greater Toronto industrial market report.

The 4.5 million square feet of positive net absorption — or tenant move-ins versus move-outs — last quarter underscores sustained demand for industrial across the region, the report said.

Avison Young did point out, though, that heightened risk stemming from macroeconomic and geopolitical uncertainty are influencing business decisions. However, the anticipated renewal of the Canada-United States-Mexico Agreement on trade is a tailwind, even if some amendments are made that disrupt the supply chain in the near term.

As for industrial rents, they declined modestly for a 10^th consecutive quarter to $16.38 per square foot — an 11% drop from a peak of $18.38 per square foot during the third quarter of 2023, Avison Young said.

Project completions and construction starts in the industrial sector have decreased, although development activity remains judicious. There are currently 24 buildings encompassing 10.5 million square feet under construction, and 18% of that is preleased, the brokerage said. That’s a noticeable drop from the 73 buildings with 17.9 million square feet under construction three years ago, of which 24% was pre-leased.

Avison Young attributed the decelerated construction to a drop in speculative activity, but noted the pipeline is balanced. The report also speculated that the most recent federal budget may support built-to-suit manufacturing and processing developments.

Nationally, the industrial vacancy rate declined to 4.6% from 4.8% at the end of last year, an indication that conditions are tightening, CoStar market data said.

Canada’s logistics sector is also poised to navigate an escalating trade with the U.S., owing to higher year-over-year rail traffic and port container volumes. Moreover, market participants told CoStar that some North American logistics operators are directing U.S.-bound goods from China through Canadian distribution facilities because of a more favourable tariff agreement.

Demand for distribution space is also benefiting from Canada’s stable retail sales and the federal government’s decision to forgo implementing broad-based tariffs on consumer imports, a CoStar analysis found.

However, demand in some manufacturing segments has softened since the middle of last year — particularly for steel, aluminum, automotive manufacturing and auto parts — because of U.S. tariffs.

Considering specialized manufacturing comprises a third of Canadian industrial inventory, of which a substantial portion is owner-occupied, the country’s broader industrial sector is considered to be less susceptible to trade-related risks than in recent years.

Source Costar Click here for the full story.