In the first of a two-part interview, Allison Marsales, head of Canadian brokerage for Cushman & Wakefield, provides her insights on increased vacancy and subleasing activity in Canada’s industrial real estate sector.

What’s your take on the findings published in C&W’s Canadian first-quarter industrial report?

There’s two stories that stand out in the industrial world. We’re continuing to see vacancy climb in the major markets. If we look back to the last quarter, the flood of inventory has become much slower. Vacancy in the last quarter went from 2.7% to 3.3% [quarter-over-quarter.] So, that’s 60 basis points. As we started to see that trend of vacancy increasing, you really saw it going up: 40 basis points, 50 basis points. And, now, we’re at 60 basis points.

The second piece, which is something that is very unique, that we’re just starting to really see come to the forefront is: Sublease space in the industrial. We generally don’t talk very much about the sublease space in the industrial, so we’re starting to see that in leaps and bounds. There’s been a lot of new product that’s come to the market over the last few years. Now, people are not looking to occupy that product [as they were previously], and put it up on the sublease market [instead.] So, I think that that’s a story that we’re going to continue to see, at least for the short term.

What do you attribute that increase in subleasing activity to?

There was such a massive pipeline of new construction. You almost couldn’t build it fast enough. Everybody was looking to take on space because the market was so exceptionally tight, like we saw in the office market pre-pandemic. I’m talking about the office market specifically in Toronto, where people were taking more space because of the concerns about not having enough space. I think we saw that in the industrial world.

Now that that space is is actually coming to the market and being delivered, I think that some of the industrial groups are looking at that and saying: ‘Do we really need that amount of space? ‘Let’s try and sublease that.’

And, the demand for goods has slowed. The economy is impacting people spending money. So, that whole story in terms of less demand for space because there’s less demand on goods? You’re going to start to see that flush through the pipeline.

What about this vacancy that’s creeping up. Some people are seeing it as a good thing and not a major concern. What’s your take?

Let’s just remember that vacancy is only 3.3% for Q1, even notwithstanding all of the things that we just talked about. I am not worried. Yes, we’re starting to see that grow. But, I think, over the long haul, industrial is still a very healthy asset class. I think it will continue to be a healthy asset class. Particularly in markets like Vancouver, markets like Toronto where you continue to see a lot of immigration come into the city. That impacts the demand for goods over the long term. [The national industrial market] is going to be just fine. We went through this massive, hyper growth and the [rental] rates were high.

So, this [situation] is moving us more into a balanced market.