Montreal’s growing technology sector is one reason why office tenant demand in the city hit a record high in 2017, setting up what could be the first landlords’ market in more than 20 years, according to CBRE.
In CBRE’s Canada Q4 2017 Quarterly Statistics Report. Montreal saw more than 1.93 million square feet of positive absorption, breaking the previous record of 1.8 million square feet set in 2007. Record low unemployment and a strengthening economy are boosting this demand, which comes amidst rising asking rents that have increased 4.8 per cent year-over-year, to $22.22 per square foot for Class A downtown properties as of Q4 2017.
Rents in 2018 are expected to jump higher due to demand and lack of large blocks of office space, shifting negotiating power away from tenants.
“Similar to how the housing market is traditionally described as either a ‘buyers’ or ‘sellers’ market, the same thinking can be applied to commercial real estate as market conditions dictate the balance of negotiating power between business tenants and landlords,” said Avi Krispine, managing director of CBRE Quebec.”
Tech sector heats up office market
Montreal’s tech sector has experienced sustained growth over the last year. In addition to the city’s renowned multimedia sector, with companies in the video game, multimedia and digital entertainment industries driving office space demand, the artificial intelligence (AI) field is beginning to establish a larger footprint.
Thales Group, a French multinational that designs and builds electrical systems for aerospace, defense, transportation and security markets, recently announced the creation of the Centre of Research and Technology in Artificial Intelligence eXpertise (cortAIx). Borealis AI, an RBC Institute for Research, also announced plans to open an AI lab in the city.
Scarcity of office space
The 1.93 million square feet of additional office space that was occupied in 2017 was met with only 1.35 million square feet of new product on the market. This led the overall Montreal office vacancy to drop a full 100 basis points to 12.8 per cent, with the downtown market in particular dropping 90 basis points to 9.7 per cent.
“Companies looking to expand in their current buildings or new entrants in need of enough space to house large operations are finding it hard to keep all of their employees under one roof,” noted Krispine. “Much of Montreal’s vacant space is made up of only 5,000-6,000 square foot pockets. Instead, companies with these large space requirements are having to get creative and open second or third office locations to accommodate their workforce.” In some instances, companies, such as National Bank, are looking at purpose-built options to create their new home instead of leasing existing space.”