Tenants must be prepared to settle for less, drive long distances and pay more than they expected in Montreal’s sizzling industrial market.
Those were among the trends that emerged at a session on industrial real estate at the Montreal Real Estate Strategy & Leasing Conference, held virtually on Oct. 6.
“I’ve never seen such a hot market with so low inventory,” said Paul-Eric Poitras, managing partner at NAI Terramont, who moderated the session. He noted vacancy rates in Greater Montreal are less than one per cent – as low as they’ve ever been.
“It’s a real struggle these days to make a deal happen and to find the right space. I say to my customers ‘My job is not to get you a deal. My job is to get you a space.’ ”
Tenants need to be thinking long-term, said Matthew Virgini, vice-president, leasing at Triovest, a real estate investment and management firm with more than 10 million square feet of industrial space in Montreal.
“You need to plan for your space needs over a longer horizon as opposed to a short term. You don’t have options anymore so you have to be thinking forward a little more,” Virgini said.
Broccolini and Triovest have teamed up to develop and lease 400 Montée Cadieux in Vaudreuil-Dorion, a 246,000-square-foot facility with 32-foot clearance set to be completed next summer.
Suggested strategies for tenants
Virgini said tenants should also consider taking more space than they need. “If you need 100,000 square feet, why not commit to 150 (thousand)?” he said. “You can always sublet the balance of that. You can control your own destiny.”
Tenants must have much shorter lists of key criteria, said Gil Kastner, chief leasing and business development officer at Groupe Quint, which has about two million square feet of spec development projects underway in the Montreal area.
“If they have a shopping list of 10 items, they need to be prepared to accept two or three or four.”
In addition to rental rates doubling over the last five years, the days are gone when there were 10 options for every tenant, Virgini said.
“Now it’s one option if you’re lucky.” Back in the day, he joked, he offered the naming rights to his first child to one broker.
“Now when tenants ask for anything, the answer is no. It’d tough being a tenant out there.”
Poitras said many tenants are not up to speed with what the market looks like and get a cold shoulder when they see today’s rates.
In addition, landlords can pick and choose the tenants they prefer.
“Landlords are choosing the filet mignon and the ground beef is staying in the counter. They want the filet mignon and they can get it,” Poitras said.
Spec building for Montreal industrial
The Montreal industrial market has also changed when it comes to development on spec, Virgini said. Until three years ago, when the market started to surge, spec industrial developments could be counted on one hand.
But “in today’s market, if you build on spec, you’re going to lease it,” Kastner said. “Spec building has value in this market (given that many industrial sites on the island of Montreal cannot be expanded.)
“We’re pivoting to build spec properties because we know we’re going to lease them when they come to market.”
Much of the interest in spec developments is coming from logistics, transport, e-commerce and last mile companies, he said.
While tenants would like to stay on the island and eye bridge traffic warily, they have to be prepared to travel to the periphery – places like Vaudreuil, Boisbriand, Beauharnois, Coteau-du-Lac, Hawkesbury and even Casselman, Ont., Virgini said, referring to RoseFellow’s announcement last month that it will build a 531,000-square-foot distribution facility for Ford Canada.
The town is between Montreal and Ottawa near the Quebec-Ontario border.
A different landlord-tenant relationship
Kastner, who has spent most of his career being a landlord in a tenant’s market, noted it’s very different being a landlord in a landlord’s market. There is tension between brokers and their clients, brokers and landlords and landlords and existing tenants.
Some of the tension is between landlords and long-term tenants who are paying well below market rates. Kastner said landlords are not well-served by keeping those rents low.
“As a landlord, if you are not put pushing them to the market (rate), you are not doing your job. The value increase you generate for the building when you bring people up to market rates in this market is astronomical and it’s essential for us to work in our best way to do that.
“If the tenant can’t survive the rise in the market property, then they should go somewhere else.
“We have to be the big bad landlords in these types of situations. To give a tenant a break of $2 a foot is giving away pure value for no reason.”