Canada’s industrial real estate market is tightly connected to its export performance. When the export sector contracts, the ripple effects extend to logistics, manufacturing, and distribution, which rely heavily on industrial real estate. As exports decline, the demand for industrial spaces could weaken, creating broader challenges for the real estate market. This article examines the link between the downturn in Canadian exports and the potential impact on industrial real estate demand, while also considering how the recent rate cuts might influence this trend.

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Export Declines in Canada

As highlighted in the latest Monetary Policy Report from October 2024, Canada's export sector has been significantly impacted by slowing global demand, leading to a contraction in key areas such as energy, automotive, and manufactured goods. In Q3 2024, Canadian exports saw a 2.8% decline compared to the same period in 2023. Energy exports, which constitute a large part of the country’s export base, dropped by 4.1% year-over-year, while automotive exports saw a 6.5% reduction.

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This decline in exports directly affects industries that depend on global trade and international demand, such as manufacturing and logistics. These sectors occupy a considerable portion of Canada’s industrial real estate market, with major hubs like Toronto, Vancouver, and Calgary hosting a significant share of these industries.

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Impact on Industrial Real Estate

Industrial real estate is traditionally buoyed by sectors like warehousing, logistics, and manufacturing, which are the first to feel the effects of declining exports. The recent slowdown in export activity means that companies reliant on international trade are rethinking their space requirements.

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1. Warehousing and Distribution

Warehouses, distribution centers, and logistics facilities play a critical role in managing the flow of goods. With the fall in export volumes, demand for storage and logistics space is expected to decrease, particularly in key export-related hubs. For instance, ports like Vancouver and Halifax, which facilitate the export of goods to markets in Asia and Europe, are already experiencing lower traffic. As a result, warehouse space vacancy in these regions has risen from 1.5% to 2.1% in Q3 2024, marking the first significant uptick since the COVID-19 pandemic.

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According to CBRE, national warehouse vacancy rates increased slightly to 2.3%, primarily in export-heavy regions, as companies delayed or canceled new leasing agreements in response to reduced trade activity.

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2. Manufacturing Hubs Facing Headwinds

Manufacturing has always been one of the key drivers of demand for industrial real estate. However, with manufacturing exports down 4.3% as of Q3 2024, areas like Ontario and Quebec—which are home to major manufacturing hubs—are witnessing softer demand for industrial spaces. Toronto, Montreal, and other urban centers have seen new industrial space vacancies reach 2.5%, up from 2% earlier in the year.

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Additionally, automotive manufacturing, which is particularly vulnerable to export trends, has seen its industrial space needs reduced, contributing to increased vacancy rates in key regions such as Windsor and London, Ontario.

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3. Logistics and Supply Chain Sectors

The slowdown in export activities is also hitting logistics companies, which typically occupy large industrial spaces. According to the Canadian Transportation Agency, freight volumes crossing the U.S.-Canada border fell by 5.1% year-over-year in Q3 2024. This decline has reduced the need for large logistics hubs, especially in provinces with high exposure to U.S. exports, such as British Columbia and Ontario. As a result, logistics firms are reconsidering new leases or expansions, contributing to a 0.3% increase in industrial vacancy in these regions.

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The Influence of Rate Cuts on Industrial Real Estate Demand

In 2024, the Bank of Canada introduced four consecutive rate cuts, bringing the benchmark interest rate down to 3.75%. While lower interest rates typically stimulate borrowing and investment, their impact on the industrial real estate market is less pronounced when exports are struggling. Although borrowing is now more affordable, the overall economic uncertainty tied to declining global demand has created a cautious outlook among industrial real estate investors.

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Lower borrowing costs may lead to some increase in new developments, but with exports declining, there are concerns that vacancy rates in existing industrial properties will rise further, limiting the appetite for new projects. As noted by the Bank of Canada in its October 2024 report, the economic outlook remains uncertain, particularly as global demand for Canadian goods remains weak.

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Long-Term Implications for Industrial Real Estate

While the short-term outlook for industrial real estate may be challenging due to declining exports, long-term demand will likely rebound as global economic conditions improve. Key factors that could drive a recovery in industrial real estate demand include:

• Reshoring of manufacturing: As companies bring manufacturing operations back to Canada to reduce reliance on global supply chains, this could increase demand for industrial spaces in the future.
• E-commerce growth: The continued growth of e-commerce and the need for fulfillment centers will likely support demand for industrial space, even in times of export weakness.
• Government incentives: Recent policy measures aimed at boosting manufacturing and trade could help stimulate demand for industrial real estate, especially in high-growth sectors like technology and green energy.

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Conclusion

The decline in Canadian exports is posing a significant challenge for the country’s industrial real estate market. As exports fall, demand for warehousing, logistics, and manufacturing spaces is expected to soften, particularly in regions reliant on international trade. While the recent interest rate cuts may provide some relief, a sustained recovery in industrial real estate demand will depend on the stabilization of global trade and exports. In the meantime, real estate investors and developers should monitor the situation closely and adapt to the changing landscape.

Source: Bank of Canada, Monetary Policy Report.