Montreal's investment deal volume expected to slide in Q2 and the second half of 2020

Downtown Montreal office market making gains

Tuesday, July 17, 2018

Employment growth and a GDP uptick surpassing the national average underpin healthy office demand in downtown Montreal. Rents are rising, the availability rate remains steady even with the arrival of newly completed space and construction crews are busy on in-progress commercial, multi-residential and public infrastructure projects. Two new reports summarizing the first half of 2018 conclude the city is a standout among major Canadian markets.

“The outlook for business in Montreal has seldom been stronger than it is now,” maintains Jean Laurin, president and CEO of Devencore.

The real estate advisory firm’s newly released market report pegs the availability rate at 12.2 per cent across eight downtown submarkets and all building classes, and cites an average gross rent of $34.46 per square foot in 52.7 million square feet of inventory. During the past 12 months, 745,000 square feet of new space came onto the downtown Montreal office market, but the availability rate sits just 10 basis points higher, while average gross rents have pushed up more markedly from $32.79 per square foot at the end of June 2017.

Class A space along the René-Lévesque Boulevard corridor commands the downtown’s highest gross rent at $47.90 per square foot. Availability in this largest downtown submarket, with nearly 11 million square feet of space, is almost exactly aligned with the overall average. The rent gap between Class A and B space is most pronounced, at $13.15 per square foot, versus the narrower $6.40 to $7.40 per square foot gap in submarkets with lower availability rates.

“The once Flight to Quality trend has now become a Flight to Creativity as landlords demonstrate ingenuity and inventiveness during the redevelopment of space,” CBRE analysts suggest, in pinpointing the key trends shaping Montreal office market statistics for the second quarter of 2018. “This trend extends across all assets/classes, ranging from new construction to the retrofitting of Class C product.”

In the broader economic context, 2017 saw a 3.5 per cent increase in Montreal’s real GDP, while the business support agency, Montréal International, reports 48 foreign businesses established or expanded ventures last year, translating into 5,000 direct high-wage jobs. That’s in line with the investment returns the Canada Property Index recorded in 2017, in which a total return of 6.5 per cent on Montreal-based properties nearly doubled the 3.3 per cent total return of 2016.

“We are seeing a lot of interest from foreign capital and domestic capital,” Colin Johnston, Colin Johnston, president, research, valuation and advisory with Altus Group, observed in a panel discussion when those results were released last February.

Multi-billion-dollar infrastructure investments in a new Champlain Bridge, highway interchange and light rail public transit are expected to significantly improve transportation networks. The Quebec government has also pledged to support technological innovation and the transition to a low-carbon economy.

Devencore’s use of the availability rate — which adds available sublease space and space where tenants have confirmed a pending move-out to the narrower measurement of current vacancies — complements a market where major downtown projects are slated to deliver nearly 1.5 million square feet of new office space in both single-purpose and mixed-use buildings. The vast majority of this is found in Quartier International, which, due to this construction, is set to become the second largest office submarket downtown. Currently, its availability rate hovers just above 9.5 per cent with Class A buildings commanding average gross rents of $43.20 per square foot and Class B securing gross rents of $34.05 per square foot.

“Because availability rates are relatively high, this is a very good time for tenants to be negotiating a new lease or renewal, as space options in most office categories are very good,” Laurin advises. “However, brick-and-beam offices, which are highly sought after by the creative class of tenant, are in short supply, as are larger blocks of contiguous space.”

CBRE concurs with that analysis. “The existing loft office space has been unable to keep up with demand from large occupiers and these users are now taking up higher-priced built-to-suit loft offices,” it states.

CBRE pegs Montreal’s overall downtown office vacancy rate at 9.6 per cent — 110 basis points lower than the average across 10 national markets surveyed — with a tightening to 8 per cent for Class A space. Average Class A net rent of $22.58 per square foot likewise outperforms the national average of $21.35 per square foot.

Toronto’s 2.9 per cent downtown vacancy rate arguably positions it as Canada’s best landlords’ market, even though the average Class A net rent of $31.36 per square foot trails Vancouver’s $38.11 average. Still, Montreal looks rosy from the perspective of the comparably sized downtown Calgary market. There, the vacancy rate sits just below 28 per cent with the average Class A net rent at $16.51 per square foot.

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