Tariffs, Oversupply, and E-Commerce Slowdown - After Years of Growth, the Industrial Real Estate Market Must Brace for a Hard Landing
March 21, 2025
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
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The Canadian industrial real estate sector is facing severe headwinds and an accelerated market shift due to broad-ranging tariffs impacting multiple industries. This comes amid declining absorption rates, rising vacancies, and record-high supply, placing significant downward pressure on rents and driving availabilities higher. Compounding these challenges is the speculative nature of much of the incoming supply, with historically low pre-leasing levels.
This shift is particularly concerning given the broader struggles in commercial real estate and the condo market, alongside an impending economic slowdown fueled by higher tariffs. |
Unlike the Trump-era tariffs of 2017-2018 which had a limited impact due to strong economic growth and constrained supply, the current landscape is far more fragile. The economy is weaker, vacancies are climbing, and e-commerce, once a key driver of warehouse demand, is hitting a ceiling. With industrial space built on expectations of sustained e-commerce expansion, many properties now face prolonged vacancies, adding further strain to an already vulnerable market.
Declining Absorption and Rising Vacancy
In 2024, net absorption in Canada’s industrial sector turned negative for the first time in years. Despite a late year rebound, overall demand remains weak, particularly in key markets like Montreal, where negative absorption persisted throughout the year. This marks a stark contrast to the 2017-2018 period when industrial demand was strong, supply was limited, and net absorption remained consistently positive.
By the end of 2024, the national industrial vacancy rate surged to 4.8%, rising 160 basis points year-over-year. Some major markets, including Montreal and Calgary, saw vacancy rates exceed 6%, signaling a growing oversupply relative to demand[1].
Declining Absorption and Rising Vacancy
In 2024, net absorption in Canada’s industrial sector turned negative for the first time in years. Despite a late year rebound, overall demand remains weak, particularly in key markets like Montreal, where negative absorption persisted throughout the year. This marks a stark contrast to the 2017-2018 period when industrial demand was strong, supply was limited, and net absorption remained consistently positive.
By the end of 2024, the national industrial vacancy rate surged to 4.8%, rising 160 basis points year-over-year. Some major markets, including Montreal and Calgary, saw vacancy rates exceed 6%, signaling a growing oversupply relative to demand[1].
Figure 1.0
Source: CBRE
Key Drivers Behind Rising Vacancy
- Massive New Supply: A record 35.6 million square feet (msf) of industrial space was delivered in 2024, surpassing previous highs.
- Slower Leasing Activity: Pre-leasing rates dropped sharply to 36% by Q4 2024, down from over 90% in previous years.
- E-Commerce Slowdown: Retailers and 3PLs, which aggressively expanded during the pandemic, are now scaling back, leading to rising sublease availability.
Figure 2.0
Source: CBRE
A significant portion of new industrial space under construction is speculative, with over 65% of projects lacking pre-leased tenants as of Q4 2024. This oversupply poses a serious challenge for landlords who may struggle to fill vacancies amid slowing demand.
In contrast, the 2017-2018 period saw strong pre-leasing commitments due to limited availability (10-15 msf supply per year). At that time, absorption remained robust at ~25 msf, and speculative construction was far lower.
The rise in vacancy and speculative supply is putting downward pressure on rental rates. The national average asking rent fell 4.6% in 2024, with Toronto, Montreal, and Vancouver experiencing the steepest declines. This shift marks a sharp reversal from the pre-pandemic years when high demand and constrained supply drove double-digit rent growth.
In contrast, the 2017-2018 period saw strong pre-leasing commitments due to limited availability (10-15 msf supply per year). At that time, absorption remained robust at ~25 msf, and speculative construction was far lower.
The rise in vacancy and speculative supply is putting downward pressure on rental rates. The national average asking rent fell 4.6% in 2024, with Toronto, Montreal, and Vancouver experiencing the steepest declines. This shift marks a sharp reversal from the pre-pandemic years when high demand and constrained supply drove double-digit rent growth.
Figure 3.0
Source: CBRE
E-Commerce Growth Hits a Ceiling
A large share of recent industrial space development was fueled by expectations of sustained high e-commerce growth, mirroring the surge seen during and after COVID-19. However, the sector has now reached a plateau, with growth slowing significantly.
A large share of recent industrial space development was fueled by expectations of sustained high e-commerce growth, mirroring the surge seen during and after COVID-19. However, the sector has now reached a plateau, with growth slowing significantly.
Figure 4.0
Key Factors Behind the E-Commerce Slowdown:
This shift means that much of the newly built industrial space, designed with e-commerce tenants in mind, may struggle to find occupants at the previously expected rental rates.
Weaker Domestic and Global Economic Growth Compounds the Problem
The broader economic slowdown is intensifying challenges in the industrial real estate sector. Canada’s GDP growth fell to just 1.3% in 2024[3], a sharp decline from the ~3% growth seen in 2017-2018 when strong manufacturing and trade activity supported industrial demand.
Even before the latest tariff escalations, slowing global trade was already weakening demand for industrial space, particularly in export-dependent markets. Warehousing, logistics, and manufacturing—core drivers of industrial real estate—are among the first sectors impacted by declining exports.
The January 2025 Monetary Policy Report[4] underscores the significant impact of weakening global demand on Canada’s export sector, causing contractions in key industries such as energy, automotive, and manufactured goods. In response, the Bank of Canada has revised its 2025-2026 export growth projections downward by 1.8 percentage points, lowering its previous 4% forecast from October 2024. 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.[5]
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.
Warehousing, manufacturing, and logistics face rising vacancies due to declining exports. Warehouse vacancies in Vancouver and Halifax grew to 2.1% in Q3 2024. Ontario and Quebec manufacturing hubs saw vacancies reach 2.5%, while a 5.1% drop in U.S.-Canada freight volumes weakened logistics demand, increasing industrial vacancies by 0.3% during the same period[6].
Compounding these challenges is the uncertainty surrounding tariffs and trade relations. The new tariffs imposed by the U.S. on Canadian steel, aluminum, and other goods are expected to have a significantly greater impact than the 2017-2018 tariffs. Unlike last time, the current economic conditions, coupled with higher interest rates and slowing industrial demand, make these tariffs more damaging.
- Market Maturity: Between 2019 and 2021, Canadian e-commerce sales skyrocketed by over 75%, leading to rapid expansion in warehousing and logistics real estate. However, as of 2024, online retail accounts for only 6.5% of total retail sales, a modest increase from 5.8% in 2023. Once characterized by double-digit growth, e-commerce is projected to stabilize in the single digits by 2025.
- Shift Back to Brick-and-Mortar: Physical retail is rebounding with increased foot traffic in malls. According to JLL, Canada’s 2024 Holiday Shopper Survey[2], 74% of consumers preferred shopping centres over online retail, signaling a return to in-person shopping habits.
- Warehouse Overexpansion: Many logistics and retail companies overcommitted to industrial space during the pandemic, anticipating prolonged e-commerce demand. As sales growth slows, excess warehouse capacity is becoming more evident.
- Rising Consumer Costs: Inflation, higher interest rates, and economic uncertainty have led to more cautious spending, particularly in discretionary online purchases.
This shift means that much of the newly built industrial space, designed with e-commerce tenants in mind, may struggle to find occupants at the previously expected rental rates.
Weaker Domestic and Global Economic Growth Compounds the Problem
The broader economic slowdown is intensifying challenges in the industrial real estate sector. Canada’s GDP growth fell to just 1.3% in 2024[3], a sharp decline from the ~3% growth seen in 2017-2018 when strong manufacturing and trade activity supported industrial demand.
Even before the latest tariff escalations, slowing global trade was already weakening demand for industrial space, particularly in export-dependent markets. Warehousing, logistics, and manufacturing—core drivers of industrial real estate—are among the first sectors impacted by declining exports.
The January 2025 Monetary Policy Report[4] underscores the significant impact of weakening global demand on Canada’s export sector, causing contractions in key industries such as energy, automotive, and manufactured goods. In response, the Bank of Canada has revised its 2025-2026 export growth projections downward by 1.8 percentage points, lowering its previous 4% forecast from October 2024. 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.[5]
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.
Warehousing, manufacturing, and logistics face rising vacancies due to declining exports. Warehouse vacancies in Vancouver and Halifax grew to 2.1% in Q3 2024. Ontario and Quebec manufacturing hubs saw vacancies reach 2.5%, while a 5.1% drop in U.S.-Canada freight volumes weakened logistics demand, increasing industrial vacancies by 0.3% during the same period[6].
Compounding these challenges is the uncertainty surrounding tariffs and trade relations. The new tariffs imposed by the U.S. on Canadian steel, aluminum, and other goods are expected to have a significantly greater impact than the 2017-2018 tariffs. Unlike last time, the current economic conditions, coupled with higher interest rates and slowing industrial demand, make these tariffs more damaging.
How the New Tariffs Differ from the 2017-2018 Tariffs
Impact of New Tariffs on industrial Sectors and Regions
Which Markets Are Most at Risk?
Looking ahead, the key questions for investors and landlords will be:
While industrial real estate has historically been a pillar of stability, it can no longer be relied upon as an unshakable segment of Canada’s real estate economy. The coming year will be pivotal in determining whether the current downturn is a short-term correction or the start of a more prolonged shift in market dynamics.
At the Real Estate Institute of Canada (REIC), we recognize the rapidly evolving industrial real estate landscape and the growing need for ethical leadership and strategic decision-making in uncertain times. As vacancies rise, speculative supply expands, and economic pressures intensify, we remain committed to equipping industry professionals with the latest market insights, risk management strategies, and adaptive solutions through our continuously updated educational programs and professional certifications.
Our proprietary credential verification tool ensures that businesses and consumers connect with trusted, highly qualified professionals who uphold the highest standards of integrity, expertise, and excellence—critical in today’s increasingly complex and shifting market.
- How long will it take to absorb the current oversupply?
- Will rent reductions continue, or will landlords find ways to maintain pricing power?
- How will economic uncertainties, including tariffs and slowing GDP growth, impact future demand?
While industrial real estate has historically been a pillar of stability, it can no longer be relied upon as an unshakable segment of Canada’s real estate economy. The coming year will be pivotal in determining whether the current downturn is a short-term correction or the start of a more prolonged shift in market dynamics.
At the Real Estate Institute of Canada (REIC), we recognize the rapidly evolving industrial real estate landscape and the growing need for ethical leadership and strategic decision-making in uncertain times. As vacancies rise, speculative supply expands, and economic pressures intensify, we remain committed to equipping industry professionals with the latest market insights, risk management strategies, and adaptive solutions through our continuously updated educational programs and professional certifications.
Our proprietary credential verification tool ensures that businesses and consumers connect with trusted, highly qualified professionals who uphold the highest standards of integrity, expertise, and excellence—critical in today’s increasingly complex and shifting market.
[1] https://www.cbre.ca/insights/figures/canada-industrial-figures-q4-2024
[2] https://www.jll.ca/en/newsroom/Canada-Retail-Holiday-Survey
[3] https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/CAN?zoom=CAN&highlight=CAN
[4] https://www.bankofcanada.ca/wp-content/uploads/2025/01/mpr-2025-01-29.pdf
[5] https://www.kelownarealestate.com/blog-posts/how-declining-exports-could-weaken-industrial-real-estate-demand-in-canada
[6] https://www.kelownarealestate.com/blog-posts/how-declining-exports-could-weaken-industrial-real-estate-demand-in-canada
[7] https://www.cbre.ca/insights/figures/canada-industrial-figures-q4-2024
[2] https://www.jll.ca/en/newsroom/Canada-Retail-Holiday-Survey
[3] https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/CAN?zoom=CAN&highlight=CAN
[4] https://www.bankofcanada.ca/wp-content/uploads/2025/01/mpr-2025-01-29.pdf
[5] https://www.kelownarealestate.com/blog-posts/how-declining-exports-could-weaken-industrial-real-estate-demand-in-canada
[6] https://www.kelownarealestate.com/blog-posts/how-declining-exports-could-weaken-industrial-real-estate-demand-in-canada
[7] https://www.cbre.ca/insights/figures/canada-industrial-figures-q4-2024
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]