Data from sales files shows us that the industrial real estate market has experienced strong growth over the past few years. Annual growth rates were close to 12%, far higher than the typical 2-4% seen in prior years. This growth has been driven by the combination of construction cost inflation, high demand, and low interest rates.
Capitalization rates continue to be influenced by interest rates along with market supply and demand. Sales data within our Firm indicates that as interest rates rise, capitalization rates tend to rise as well. With recent interest rate increases it is likely there will be upward pressure on market cap rates.
A chart from the Colliers International Quarterly Cap Rate Report from the fourth quarter of 2022 shows interest rates for commercial mortgages and bond yields relative to a national average of cap rates from 2007 to the end of 2022. The spread between bond rates and cap rates is currently quite narrow, further supporting a likely increase in capitalization rates if the future looks like the past.
In terms of industrial leasing, there has been strong growth in lease rates over the past few years. This growth has been driven by demand and falling vacancy rates. Lease rates have increased by around 6% per year from 2018 to early 2023, with most of that increase occurring since late 2021.
Vacancy rates have been trending downward over the past few years, with industrial vacancy rates at their lowest point in the past decade as of late 2022.
Industrial land prices have seen strong growth in some areas, particularly in the northwest part of Winnipeg that includes CentrePort and Headingley on the west side of the city. The southwest part of Winnipeg, including the Fort Garry Industrial region, has also seen strong growth. On the east side of the city, land values are lower, but there has been some appreciation in prices.
In summary, the industrial real estate market has experienced strong growth over the past few years, driven by a combination of factors such as construction cost inflation, high demand, and low interest rates. Going forward, we believe that the market will continue to see growth, but at a slower pace than in recent years.