TD Waterhouse Comments on Industrial Outlook
No Slowing of Demand for Canada's Industrial Space - Q1/22 Stats
Event
CBRE's Q1/22 industrial statistics (see the exhibit on page 2).
Impact: SLIGHTLY POSITIVE
Canada's industrial real-estate market continues to exhibit exceptionally strong fundamentals, with national vacancy falling 20bps q/q to yet another record[1]low of 1.6%. Average market rents also achieved another record-high at $11.20/sf, with the pace of growth (+7% q/q and +17% y/y) also among the highest on record.
Demand continues to meaningfully exceed supply. Although developers added 15% q/q to their aggregate pipeline under construction, the current 42mmsf still represents just 2.2% of nationwide inventory (and is 69% pre-leased). CBRE expects 38mmsf of development completions in 2022, representing 2.0% new supply growth (versus 1.9% in 2021).
The slight vacancy compression in Q1/22 reflects further tightening of minimal vacancies in the strongest markets (Toronto, Montreal, Vancouver, Waterloo Region, and Ottawa), along with continuing positive momentum in recovering markets (Edmonton, Calgary, and Winnipeg). Five of Canada's 10 main industrial property markets now have vacancy rates below 2%, and rank among the tightest in all of North America.
Market rent growth remains strong, with Toronto (+11% q/q, +30% y/y), Vancouver (+7% q/q, +24% y/y), and Montreal (+11% q/q, +40% y/y) leading the pack, along with the Waterloo Region (+24% q/q). With sub-1% vacancy rates, all these markets are past their inflection points, causing rents to spike. We are confident that strong rent growth will continue.
Among the strengthening/recovering markets, Calgary is first to witness accelerating rent growth (+4% q/q, +12% y/y).
Industrial property remains a preferred asset class of ours, particularly considering today's inflationary environment. We believe market statistics and REIT operating results continue to demonstrate that industrial properties have strong pricing power, low capex, and high operating margins. The inability of developers to meet demand also indicates the existence of sizeable barriers to entry, in our view. With the YTD sell-off of Canadian industrial REITs, they are now trading at 25.5x average P/AFFO multiple on our 2022E, 32% below the U.S. peers and 30% below European peers. On P/NAV, the Canadian peer group is trading at 103% on average versu s 117 % for the U.S. and 177 % for the European peers.