Challenging Environment: Entering Q2-2024, the industrial real estate sector confronts a challenging environment. The fluctuating demand and low interest rate, peaking in 2020 to 2022 from fear of missing out and efforts to prevent back-orders, has significantly influenced speculative construction and warehousing demand. The market, however, has cooled for the past few months, with 2024 anticipated to see a rise in sub-leasing availability and diminished sales expectations. We are observing a decrease in rental asking prices, ranging from 10% to 20%, which highlights the growing need for owners and developers to draw in and keep tenants in a competitive market environment.

Decrease in Import Volumes: This period is marked by a broader downturn in industrial demand across North America, evidenced by a drop of approximately 12.5% in import volumes at major U.S. ports and around 15% at key Canadian ports from mid-2022 levels. The 9% reduction in TEUs this year compared to 2023 in the Montreal port indicates a likely continuation of the downward trend in warehousing demand for 2024. It is important to note that demand for Distribution Centers (DC) often reflects a related reaction to changes in port imports, making a prolonged reduction in TEUs a potential early indicator for a wider decrease in warehouse demand at the macro level—a trend that industry stakeholders should monitor closely.

Increase in DC Spaces for Subletting: The recent influx of DC spaces available for subletting, including a 600,000 sq ft space in Vaudreuil-Dorion with a 32-foot clear and a 40-foot clear building, exacerbate the situation, and the ongoing issues with the Vaudreuil-Dorion bridge pose further logistical challenges. In addition, recently, a nearly 900,000 sq ft at 22 feet clear Saint-Laurent also became available to sublet. It is our belief that only DCs boasting superior features and locations will navigate the economic shifts successfully. The demand for efficient DCs will be particularly pronounced among enterprises aiming to refine their operations with added-value operations; thus, features such as a 36.5 feet clear height or greater, 140,000 sq ft or larger DCs, prime locations, and efficient real estate operational costs will become paramount.

Opportunities for Growth: Despite these challenges, the Greater Montreal Area (GMA) features a resilient labor market, a robust manufacturing sector, and fully integrated enterprises, presenting significant opportunities for growth. However, secondary and tertiary markets are expected to face prolonged periods of low demand, attributed to transportation costs and a trend towards densification in core markets.

The transition towards Zero Carbon Building (ZCB) Performance standards and the rising need for robotic distribution centers are driving a transformation in the industry, aimed at reducing operating costs. Notably, ZCBs stand out for their impressive utility savings, facilitated by enhanced insulation and vertical levelers, and offer warehouse temperature control at no additional cost. Moreover, Montreal's aggressive promotion of ZCB standards through a 100% municipal tax incentive, up to $1M annually for select industries, underscores the city's commitment to sustainable development and reducing the industrial real estate sector's carbon footprint in the GMA.

Savills Strategy for 2024: As the industrial real estate market in the GMA continues to evolve, the adoption of ZCB standards and the city's tax incentive program will play a crucial role in shaping the sector's future. In response to these dynamics, Savills strategy for 2024 is focused on leveraging rising vacancy levels to better match our clients' needs, stabilizing both rental and selling rates. We are dedicated to providing advisory support and investing in our clients to make informed decisions that align with environmentally friendly practices, reduce operational costs, and enhance efficiency. With new constructions limited to key areas, our strategic efforts will concentrate on the GMA, where the potential for leveraging land availability and cost advantages remains strong. This approach is aimed at maintaining Savills' competitive edge in our dynamic industrial real estate market, with a focus on sustainable development, technological innovation, and leveraging the region's manufacturing and labor strengths.