Navigating the Flex Space Market in Canada: Balancing Challenges with Opportunities

Canada's industrial real estate market, long dominated by logistics and specialized industrial facilities, is showing nuanced dynamics within its flex space segment. Although flex space—a versatile asset class combining warehouse, office, and production areas—represents a smaller segment compared to logistics and specialized industrial, its market signals reveal important insights about broader economic and real estate trends across the country.

Current State of the Flex Space Market

As of early 2025, Canada's flex market inventory stands at roughly 222.8 million square feet, holding a vacancy rate of approximately 2.9%, modestly below the overall industrial market's vacancy rate of 3.9%. However, despite this relatively low vacancy, flex properties have recently experienced a net absorption drop of 245,991 square feet year-to-date, suggesting an emerging softness specific to this market niche.

This drop is particularly notable given the absence of recent deliveries for flex properties, implying that this contraction in occupied space stems from weaker demand rather than oversupply.

Rental Trends: Decelerating, Yet Stable

The flex segment’s average asking rent remains resilient, currently sitting at CAD $13.47 per square foot, reflecting a modest year-over-year growth of about 2.9%. While this growth rate represents a deceleration compared to the peak figures seen during the pandemic-driven industrial boom, it remains solidly above inflation. Flex spaces thus remain an attractive asset, delivering consistent rental returns despite economic headwinds.

However, flex rents have clearly entered a cooling phase, mirroring broader trends across the Canadian industrial sector. Historically, flex properties have been attractive to tenants for their adaptability, particularly useful in uncertain economic climates. The recent moderation in rental growth suggests tenant caution, reflecting broader business uncertainty.

Regional Divergence: Flex Spaces Thrive in Specific Markets

Regionally, flex spaces demonstrate distinct performance variations. The Ottawa-Gatineau market stands out with robust rent growth, reporting a 7.3% annualized increase, which significantly surpasses other major markets such as Toronto and Vancouver, where flex rents have shown slight declines or stagnation.

Ottawa-Gatineau’s superior performance likely stems from its government-oriented economy and stable demand for hybrid workspace solutions, which continue to thrive post-pandemic. In contrast, traditional industrial hubs such as Toronto and Vancouver face stagnation primarily due to the substantial pipeline of recently completed or under-construction logistics spaces, indirectly putting competitive pressure on flex assets.

Investor Sentiment and Transactional Landscape

From an investment perspective, flex space properties remain appealing, although the segment experienced reduced transactional volumes in recent months, aligning with broader market trends influenced by rising interest rates and economic uncertainty. In early 2025, the flex segment’s transactional activity reached CAD $183.7 million year-to-date, at an average price of CAD $201.82 per square foot. This represents a significant adjustment from recent peaks, reflecting investor caution amid economic and trade uncertainty, notably concerns regarding potential U.S. tariffs impacting the broader Canadian market.

Cap rates for flex spaces have slightly adjusted upward to 5.7%, reflecting increased risk premiums and tighter liquidity. Nevertheless, flex spaces command higher prices per square foot than logistics or specialized industrial assets, signaling strong underlying demand for their adaptive characteristics.

Economic Fundamentals: Resilience Amid Uncertainty

Despite economic headwinds, including subdued employment growth and the looming threat of trade tariffs, Canada's flex market maintains appeal due to its intrinsic versatility. Businesses increasingly favor properties that can rapidly pivot functions from office to warehouse or light manufacturing, thus enhancing operational resilience.

Moreover, as transportation costs continue to dominate logistics budgets, flex spaces—often closer to urban cores—provide strategic advantages, even at premium rents. The persistent urbanization and population growth, albeit moderated, will likely continue supporting the flex space demand over the medium to long term.

Future Outlook: Balanced Optimism

Looking forward, flex spaces in Canada are poised for measured optimism. Although near-term challenges, such as negative absorption and moderated rent growth, persist, the underlying structural demand drivers remain robust. Flex space adaptability remains a crucial competitive advantage, especially in an era characterized by supply chain volatility and evolving workplace dynamics.

Investors seeking long-term stability and moderate income growth will continue viewing flex assets favorably. As the economic environment stabilizes and as speculative construction wanes—seen by the historical low of new industrial construction starts—the flex segment could experience a meaningful rebound, supported by lower competitive pressures from newly built logistics spaces.

In summary, Canada's flex space market offers nuanced insights into the broader industrial sector. Its adaptive characteristics, combined with measured investor enthusiasm and stable economic underpinnings, position flex spaces as a resilient niche amidst Canada's evolving industrial landscape. Investors and occupiers alike would do well to closely monitor this versatile market segment, which promises balanced risk and opportunity in Canada's shifting economic terrain.

April 18, 2025 by a collective of authors of MMCG Invest, LLC, a flex space feasibility study consultant and Canada feasibility study consultant