Office supply and demand in the Montreal market. (Courtesy JLL)

Montreal has joined Toronto and Vancouver as Canada’s hottest office markets, surpassing the West Coast city for first-quarter net absorption, according to new JLL reports.

“Montreal experienced the fastest economic growth out of all major Canadian cities in 2018, and it’s reflected in the office market as well,” JLL research analyst Allison Wang told RENX. “The tech sector has been leading office leasing activities since 2018.

“With many universities like McGill, Université de Montréal and Concordia, Montreal has a pool of qualified workers.”

There were 2.91 million square feet of office space under construction in the Greater Montreal Area in the first quarter of 2019, according to JLL’s Montreal report.

Downtown East is picking up traction for new development projects with the redevelopment of the old Molson brewery, Silo 5, Groupe Mach’s Quartier des Lumières and Broccolini’s new Maison de Radio-Canada all slated to be delivered in 2020.

64.5 per cent is pre-leased

Of the 1.2 million square feet of office space expected to be delivered in the next 15 months, 64.5 per cent is pre-leased.

“We notice an appetite for large quality space,” said Wang. “New projects start with larger companies like Airbnb, Microsoft and National Bank pre-leasing all or most of the building.”

Total vacancy decreased by 20 basis points to 12.1 per cent for the Greater Montreal Area (GMA), while vacancy in the suburbs decreased by 90 basis points to 16.7 per cent, in the first quarter.

The suburban market recorded net absorption of 308,292 square feet, accounting for more than half of the GMA’s total absorption of 523,549 square feet.

Downtown Montreal’s vacancy rate was 9.5 per cent during the quarter.

“We are noticing a flight to quality, where class-A buildings in downtown are taking a large portion of the absorption, whereas lower-quality buildings are losing tenants,” said Wang.

“There are also particular submarkets in midtown where vacancy is as low as downtown, as renovated lofts are highly popular with tech and creative industries.”

Midtown vacancy continued its downward trend to 13.3 per cent, the lowest rate since 2013. The South Shore recorded 112,245 square feet of net absorption during the quarter, the highest in the last seven years.

“The Montreal office market can expect modest growth and stable vacancies,” said Wang of her outlook for 2019.

Montreal has lower fit out costs

JLL’s new “Fit Out Guide” for office cost benchmarking shows the cost of fitting out offices in Montreal is consistently lower than in Toronto, Vancouver and Calgary. It’s also below the North American average, which could be another contributor to the city’s strong performance.

“The cost of living is generally lower in Montreal than in Toronto and Vancouver,” said Wang. “Especially housing is less expensive in Montreal, as the city has laws that control rent increases.

“The low cost of operation is definitely presented as a selling point to foreign companies looking to open their office in Montreal.”

Canadian office space highlights

On a Canada-wide basis, strong occupier demand coupled with modest construction completions resulted in the total vacancy rate compressing for a fifth consecutive quarter to 10.7 per cent. That was down 40 basis points quarter-over-quarter and 140 basis points year-over-year.

The national construction pipeline reached 19.4 million square feet in the quarter, the highest level since the first quarter of 2015, according to JLL. Most completions will take place in downtown markets between 2020 and 2022, which should bring some relief to tenants looking for office space in severely supply-constrained markets.

Following are snapshot highlights of the JLL reports for the first quarter of 2019 for five other Canadian office markets:

Toronto

Downtown Toronto’s vacancy rate dropped for the seventh straight quarter, while average net rents rose 6.2 per cent, the largest quarterly increase since 2009.

The vacancy rate within the Greater Toronto North East market fell 120 basis points to 9.7 per cent, according to the Toronto report.

The Toronto West market recorded 394,360 square feet of net absorption in the quarter, and the 13.4 per cent vacancy rate was down 80 basis points from the previous quarter and 230 basis points year-over-year.

Metro Vancouver

Metro Vancouver’s office market had strong net absorption across most submarkets in the first quarter, and the vacancy rate dropped 230 basis points from a year earlier to 5.8 per cent. The downtown market saw an even larger drop of 300 basis points from the previous year to 3.5 per cent.

This tightening market caused asking net rents downtown to rise by 8.3 per cent year-over-year to $34.46 per square foot, according to the Vancouver report.

Calgary

Downtown Calgary’s office vacancy rate remained unchanged at 23.5 per cent in the first quarter, with a slight positive net absorption of 6,753 square feet. The flight to quality in the downtown core drove market activity, as tenants took advantage of premier office space at discounted rates.

The suburban Calgary market remained flat with a vacancy rate of 17.4 per cent. There was 87,133 square feet of net absorption, according to the Calgary report.

Edmonton

Demand decreased as the total office vacancy rate in Edmonton increased by 20 basis points quarter-over-quarter to 17.5 per cent. The downtown vacancy rate increased by 50 basis points to 17.7 per cent while the suburban vacancy rate remained flat at 17.3 per cent.

Downtown markets exhibited 71,260 square feet of negative net absorption while suburban markets gained 9,767 square feet of net absorption, according to the Edmonton report.

Ottawa

Downtown Ottawa office net absorption accelerated in the quarter to match recent suburban demand, further compressing vacancy to an overall rate of eight per cent.

There was 271,367 square feet of net absorption and no office space under construction during the quarter, according to the Ottawa report.