The head of Blackstone's Canadian industrial real estate arm doesn't see the dynamics behind the country's ultra-low vacancy levels changing anytime soon — and he said rising interest rates are creating a new supply hurdle.

David Owen, the president and chief operating officer of Toronto-based Pure Industrial that runs 40 million square feet of industrial space across Canada, said speculative construction is restrained by the interest rates and will remain that way in the company's two major markets, Toronto and Montreal.

"If anything, rising rates have caused further constraints on new supply. I think the [new] supply side is going to remain very low as a percentage of total inventory," Owen said in an interview.

Blackstone, with US$1 trillion in assets under management, bought publicly traded Pure Industrial Real Estate Trust in a CA$3.8 billion transaction in 2018. The company, now known as Pure Industrial, is 32% owned by Ivanhoé Cambridge, a subsidiary of Caisse de dépôt et placement du Québec.

Pure Industrial's Montreal and Toronto assets each make up about 40% of its portfolio, with Vancouver comprising 10% and Quebec City and smaller markets making up the remaining 10%.

The company's strategy changed dramatically when Blackstone took it private, including selling Pure Industrial's U.S. and Alberta assets in 2020.

"We really pivoted our attention to Toronto, Montreal and Vancouver," said Owen. "I wouldn't say it's a struggle to grow in Vancouver, but it's a much smaller market, so there is less available product with pretty diverse landlord ownership. There is not a lot of institutional ownership where you can buy more extensive portfolios."

In a second-quarter report issued last month, Colliers said industrial leasing remains strong and remains a landlord's market across Canada.

"But the unprecedented leasing boom of the last few years has tapered," said the real estate company.

CBRE noted that the national development pipeline decreased to 44.4 million square feet under construction in the second quarter as more projects were completed. Still, that represents just 2.3% of the total inventory for Canada.

Owen said projections show new inventory is expected to drop and nothing significant is coming to the market.

"I think the supply situation will remain intact for the next couple of years," said Owen. "We are more focused on demand, which is becoming a more normalized market. COVID caused a vast absorption of space, but I think the tailwind of on-shoring is real and will continue."

The Pure Industrial leader said interest rates are now increasing two or three times during a development project. Holding land for three years is becoming price prohibitive based on what land is trading at today, he said.

"You had a lot of land speculators buying up product that was anywhere from four to six years from fruition, and most landlords didn't predict 6% interest rates," said Owen, noting construction costs have also climbed.

Pure Industrial does some development, though it doesn't get involved in projects that require rezoning, which can be time-consuming and unpredictable, Owen said. The company tries to lock in interest rates and hard costs early on for its projects.

Owen said most construction today has focused on large-bay industrial space, leaving only small- and mid-bay, which is the majority of the existing stock in places like Toronto.

"Everybody wanted the big shiny warehouses during COVID but we have customers all over the [spectrum]," said Owen.

In this environment, Pure Industrial has managed to buy three portfolios in the Greater Toronto Area and in 2023, it wants to buy even more, Owen said.

"Right now, from the seller's point of view, there is a disconnect from an expectation perspective. I think other buyers feel the same — the values don't reflect where interest rates are in today's environment," said Owen.

Pure Industrial has also sold some of its properties recently, including a CA$198.3 million sale in June for a 421,868-square-foot FedEx facility at 8980 Highway 27 in Vaughan.

"We are very opportunistic in nature and highly transactional," said Owen about the FedEx sale. "Like anyone else, we will sell at the right price. I loved the asset. You can't get any better."

For the most part, Pure Industrial stays within major metropolitan areas in Canada, partly so the real estate company can adequately serve its customers.

The real estate company has added about 100 employees in Quebec in the last 12 months as it deals with the 16 million square feet it bought during the Cominar Real Estate Investment Trust breakup. About 12 million square feet of the space is in the Montreal region and four million square feet is around Quebec City.

"We love Quebec as a whole," said Owen. "Montreal is our bread and better, and the rationale there is the city is a booming metropolis. People want to be there. Historically, Quebec was not where you would go if you didn't speak French. The government is pro-business like Ontario, with a Quebec nuance."

Owen said one overriding theme for many of Pure Industrial's customers is cost certainty. Owen said he encourages tenants to hire a broker so they have a better understanding of the market and the value they are getting with Pure Industrial properties.