CIBC NotesEQUITY RESEARCH
October 3, 2024 Industry Update
Industrial REITs Trail As Fundamentals
Normalize
Context Is Key
Our Conclusion
CBRE’s Q3 update reflected an ongoing normalization of the industrial sub-
sector from the strength seen in 2021-2023; however, we still see industrial
as well-positioned in a historical context. Availability increased to 4.4%,
which is ~70bps above the 10-year average. Further, while rents are down
~4% YoY, they are ~30% above the five-year average, and >60% vs. the 10-
year average. In a previous report we highlighted the strong -0.9 correlation
between vacancy and rent growth and noted that in the extreme event of the
GFC, industrial rents declined ~8%. Given how far rents have appreciated,
we still expect sector-leading SP growth, even if rents were to show a similar
level of correction.
Industrial REITs are up ~3% YTD vs. the XRE at +7%. The average NAV
discount for industrial is 11%, slightly wider than 10% for the sector, which
we view as punitive in light of the stronger SP growth outlook vs. peers.
Key Points
Continued Climb In Availability: Reflecting softer demand and new supply,
national availability was 4.4% in Q3, or ~20bps higher sequentially, marking
the eighth consecutive quarter of increases, as well as the highest rate since
2017. Availability in Toronto ticked up 30bps from Q2, and increased 50bps
in Montreal, while Edmonton, Calgary and Ottawa showed modest declines.
Rents Continue To Normalize: National average asking net rent per sq. ft.
fell to $15.67, a ~2% decrease from Q2, marking four consecutive quarters
of rent contraction from an all-time high in Q3/23. Halifax and Edmonton
were the fastest growing markets, with growth rates of ~11% and ~5%,
respectively, while Toronto, Vancouver, and Montreal saw rents fall ~4%,
~7%, and ~7%, respectively. However, putting these recent moves in
context, national rent is still 17% above the three-year average.
Deliveries Up In Q3, As Pipeline Declines: In Q3, the national construction
pipeline totalled 32.0MM sq. ft. or 1.6% of inventory, down from its peak in
2023. In Q3, 7.3MM sq. ft. was delivered, with ~46% pre-leased. New starts
were also down 0.1MM sq. ft. on the quarter, at 4.4MM sq. ft., marking a
three-year low. Toronto and Vancouver lead the group for upcoming supply,
and have 14.0MM sq. ft. and 6.8MM sq. ft. under construction, respectively.
Negative Net Absorption Continues: Nationally, there was positive net
absorption of 1.9MM sq. ft., which was largely from pre-leased new supply,
excluding which absorption was negative 1.5MM sq. ft. Calgary was an
outperformer at +1.4MM sq. ft., while Montreal saw negative net absorption
of 1.1MM sq. ft. YTD net absorption is negative 3MM sq. ft., vs. +7.9MM sq.
ft. for the same period in 2023