Supply and demand keeping Montreal office rents in check

Downward pressure can be expected on downtown Montreal office rents because demand is flat and new supply is coming.
That's the opinion of Andrew Bissett, executive vice-president of Jones Lang LaSalle Real Estate Services, who spoke at the recent Montreal Real Estate Forum during a session featuring broker perspectives on the market.
The picture is one of new supply, “flat absorption and a notable lack of demand,” says Bissett. Landlords are complaining about the time it takes to make deals and recent activity has come mostly from renewals by major tenants like Telus and Via Rail.
Bissett notes that last year there were only two properties that had more than 50,000 sq. ft. of available office space. This year, the number has grown to eight in downtown Montreal, which comprises 51 million of the metropolitan area’s 91 million sq. ft. of office space.
Place Ville Marie will also have a large chunk of space available when Deloitte moves to its new Cadillac Fairview-developed Deloitte Tower, which is slated for completion in 2015.
Bissett also wonders how the Deloitte building and two other office towers scheduled for downtown will fill their floors.

Rendering of the Deloitte office tower in downtown Montreal
LEED buildings offer prestige
But Michael Stones, vice-president, eastern region of Oxford Properties Group, notes that Cadillac Fairview will fill the LEED-certified building with conservative tenants who have corporate missions to be more environmentally responsible.
Large firms seeking the prestige of being in LEED building will also be attracted by new LEED-certified offerings, adds Alexandre Sieber, senior vice-president and senior managing director of CBRE in Montreal. “There will always be tenants looking for that type of building.”
International firms based in Montreal who consider the city’s rents to be peanuts when compared to cities like London or even Toronto will also consider the building, Sieber says. “I’m not very concerned,” about filling the Deloitte Tower, he says.
Bruce Cowper, principal of Avison Young, says Cadillac Fairview will have to demonstrate to tenants that it’s worthwhile to pay a $5 to $10 premium on rent to be in the Deloitte Tower, by showing studies that there is less absenteeism in modern and brighter buildings.
Pressure to tighten work space
Cowper also agreed that demand is on the wane in the city, asking: “What demand? Montreal is a city that hasn’t seen tremendous growth.”
While some firms are growing, the vast majority are working to create efficiencies and smaller work stations.
However, Cowper cited a report by Altus Group that found the city can absorb about 350,000 sq. ft. of office space per year, spurred by engineering firms needing space for the ongoing infrastructure projects in Montreal.
But Stones was skeptical about declining demand and falling rents, noting “I don’t necessarily see it myself.”
Sieber says that financial services firms like the Laurentian and National Banks are thriving and are seeking more space.
Some of that space has been found in E-commerce buildings downtown. Completed in 2003, those buildings originally provided tax credits to E-commerce and multi-media firms, thanks to the provincial government. However, those tax credits have now expired.
“The market expected a vast exodus when the tax credits expired,” Stones says. “But E-commerce has done well with banks absorbing space for back office operations.”
Midtown offers alternative setting and lower costs
Bissett adds that the city’s midtown area, which represents 23% of the office market, is becoming an alternative to downtown among tenants focusing on lower costs and proximity to transit.
“Being downtown is not a necessity for all,” Sieber agrees. “Being close to the Metro or even intermodal transport (bus, train, Metro) is a more important consideration for some tenants.”
Turning to the multi-residential market, Sieber says apartment building owners shouldn’t worry that the many new condos being built in Montreal will bite into apartment rentals. Only a small percentage of new condos are rented out by their owners, and that amount translates into a drop in a sea of apartments.
Only owners of top of the class apartments need worry somewhat, as they will be competing with brand new condo rentals that have better amenities, Sieber says.
Cowper added that he sees “a bit of a bubble” in Montreal’s condo market.
“I’d be inclined to wait a bit to invest,” he says, predicting that in 12 to 18 months, condos will be available for purchase at lower than construction costs.

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