Canadian Industrial Real Estate Blog

As with consumers in general, end users requiring space within industrial buildings often seize the opportunity to participate in a flight to quality, otherwise known as “Movin’ On Up”. Many of the industrial buildings that have been utilized in past decades were constructed to standards and specifications that are not conducive to the demands and use types that are commonly seen in the market today. When tenants leave these older buildings in favour of newer and better-designed facilities, the buildings they leave are naturally placed into the overall pool of buildings that are considered part of vacancy for that period of time. Two things to consider in these situations are:

1. Even though space is being absorbed in a newer building, that end user has left space behind which may very well be vacant. As such, one could consider that there was an absorption that occurred throughout the relocation. The facts are that unless the end user took space that was larger than the space they left, there was no true net absorbtion as they were simply trading facilities.  
2. One of the rogue factors that has increasingly had an impact on the vacancy rates throughout the City of Toronto proper, is the conversion of what was once industrial or commercial space (known as employment lands), to another use entirely. One of the hottest topics and activities for developers throughout the last 3 – 4 years has been residential intensification and/or the redevelopment of industrial properties to a residential use or zoning. When an industrial building is redeveloped to a use that no longer houses employees, it is theoretically removed from the overall inventory of space.

It is clear to see that the real estate market depends on net overall growth of space required in order to maintain a healthy supply and demand balance.

Otherwise known as supply and demand, vacancy and absorption rates provide a clear insight into the state of a given industrial real estate market. Here is what they mean:

Vacancy Rates - Typically expressed as a percentage of the overall inventory (the amount of industrial space existing in a given geographical area), vacancy rates indicate approximately how much space is available for lease, sublease and/or sale. The higher the rate, the more space is available for end users to choose from. The more vacancy or choice that is available causes a more robust environment for the end user to leverage their needs relative to the negotiation of terms.

Absorption Rates – This is and indicator of how much space has been committed to be occupied r “absorbed” for the pool of vacant space.

As with all supply and demand environments, those that supply the product, in this case developers, try their best to keep a healthy balance between the two at all times (easier said than done). Typical causes for supply to be over weighted are downturns in the local and global economies and weakened consumer spending confidence and/or inflamed competition by overzealous small or large-scale developers.

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