The past year saw a welcome round of interest rate cuts, the first since 2020, with the Bank of Canada’s policy rate falling five times since April to end the year at 3.25 per cent, 175 basis points below where it stood a year ago. A corner had been turned, setting the stage for a return of investor confidence.
And the resurgence could have industrial strength, says Cory Wright, managing director, B.C., with William Wright Commercial in Vancouver.
“When the economy shifts in our direction with regards to interest rates and such, that’s when buyers will come back to the table,” he said. “The mom-and-pop owners can’t afford to buy it at seven per cent interest rates at $700 a square foot.”
And without buyers, developers weren’t building – not just industrial, but residential and other investor-oriented product. That kept supplies in check, which is set to fuel a run-up in prices as interest rates fall.
“The existing inventory will get absorbed at a faster pace than we’ve seen over the past two years,” Wright said. “When the existing inventory gets absorbed, we won’t have enough inventory coming in to fill the ongoing demand we anticipate will happen. It’s going to apply to industrial more than anything.”
Small-bay units with loading at grade, such as those at 5108 North Fraser Way, Burnaby, will be absorbed first as the mom-and-pop owner-occupiers return to the market after three years. The development is across the street from Amazon’s logistics facility in the Big Bend area, the kind of development that has carried industrial through the past two years.
“Some of the biggest warehouse deals done in the past couple of years have been done by companies like Amazon, which is backfilling so much of the larger-scale stuff,” Wright said.
But as the economy improves, the breadth of activity is increasing.
“There’s so many industries that can feed that industrial market right now heading into 2025,” he said.
Susan Thompson, associate director, research, with Colliers, is equally bullish on industrial, not just in Vancouver but across the West.
“It won’t take much for demand to trigger new construction,” she said.
Demand in Vancouver is driven by the port and a growing population, while Calgary is a distribution hub for Western Canada with a growing population and evolving energy sector supporting demand for industrial space.
It’s a similar story in markets farther east. High construction costs have kept the supply of space lagging demand in Regina while Winnipeg is capitalizing on its location at the middle of the continent to be a crossroads for goods from the four corners of North America.
Conditions are such that Thompson considers industrial the sole category able to attract the level of pre-leasing banks require for project financing.
This isn’t the case for office, though the growing number of companies once again requiring workers to be in the office for a set number of hours per week could turn the tide in 2025.
“They may actually have to start leasing space again,” she says of tenants. “The ingredients are definitely lining up to indicate vacancy should come down, but any kind of market shock – and we’re obviously facing conditions where there could be – could delay that recovery.”
The biggest risk facing markets right now is Donald Trump, whose tariff-rattling policies loom large over the outlook for the coming year. While the fundamentals of the real estate market have stabilized, Trump could trigger a shakeup.
“We’re in a very difficult environment to predict,” she said. “There’s this giant orange question mark hanging over everything right now.”
Trump’s threat of a flat 25 per cent tariff on imports from Canada, Mexico and China, announced Nov. 25, is undermining the gathering optimism in the market.
“We’ve already seen little bits of it – the day after Donald Trump was elected, TikTok was told it could no longer operate in Canada,” she says.
This led to the closing of offices in Toronto and Vancouver, returning space to the market. Now the industrial market is under pressure, as 75 per cent of Canada’s exports head to the U.S.
“That in turn is going to put pressure on the Bank of Canada to maybe back off another rate cut,” Thompson said, potentially limiting new investment and hiring. “We’re worried about inflation, we’re worried about the cost of borrowing, we’re worrying about all the jobs and economy attached to this import-export market.”
Altus Group vice-president of data operations Raymond Wong isn’t jumping to conclusions, taking a wait-and-see approach. He’s pinned his hopes for the year ahead on lower interest rates.
“We’re betting on next year definitely better than this year based on interest rates alone,” he said in the firm’s outlook webinar in mid-November. “Activities are going to pick up based on interest rates and other sort of factors in the marketplace and as well as a need to deploy capital into assets which have been sort of sidelined for the last 18 to 24 months.”
Yet if investor interest hinges on lower interest rates, some are holding off until further interest rate cuts.
“The relative noise in the marketplace [is] causing some delay and some pause, and waiting for a little bit more stability hit into the market.”
Wong said 2024 has seen investment volumes trending higher than in 2023 through the third quarter, and not just because the change in the capital gains tax regime last June pulled some deals forward.
While investors remain active, product remains scarce.
“The challenge is actually finding the actual product,” he said, noting that industrial, multi-family and food-anchored retail with value-add potential are favoured. “To find food-anchored retail strips is a bit of a challenge, as well as industrial and multi-rise.”
Altus Group’s findings are paralleled by Deloitte’s review of global real estate markets in 2025, which pegs industrial and manufacturing as the top asset category for 2025, followed by data centres and multi-family. Logistics and warehousing ranks fourth, followed by hotels.
Yields are a key driver of investor interest. High interest rates pushed investors to secondary markets last year where high cap rates could compensate, but it has also put a focus on alternative investment types and value-add opportunities as existing assets can be had for less than replacement cost.
“Replacement costs are making it much more popular to invest in alternatives,” Wong said. “Data centres, self-storage, student housing, senior housing and to a lesser [degree] the life sciences … it’s a chase for yields and further growth in the [returns].”
This should help draw in a lot of the dry powder currently on the sidelines, estimated at $500 billion in institutional money and $370 billion in private funds in North America.
The normalization of office markets and stabilization in supply chains are combining to set the stage for renewed demand as tenants optimize their requirements, improving cash flows and making assets more appealing to investors.
The office market is a case in point, where top-tier space is in demand and renewals are driving rents higher.
“Demand is at least close to the activity compared to a year ago,” Wong said. “The focus is very little on way of expansions as well as renewals, and the numbers are starting to move up a little bit.”
