MONTRÉAL QUÉBEC

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Canadian Market OverviewThe current economic outlook for canada in 2011 remains cautious but stable. canada’s monetary policy and particularly, the target of 2 percent inflation have steered the economy out of the recession.

economic growth  in 2011 will be moderated  through developments  in  its  largest  trading partner,  the U.s.,  risks stemming  from  the european credit crisis,  as well  as  the strong loonie. The canadian GDp growth outlook remains around the 3.1 percent mark for 2011.

The overnight interest rate remains at 1 percent, and is expected to rise to 2 percent, with the  anticipated  shift  from  stimulus  to  restraint  in  fiscal  policy.  employment  growth  has improved recently, but the unemployment rate is still expected to remain in the 7.4 to 7.7 percent range. 

Business confidence has risen  in the past six months where conservative spending and diligence  through  the  recession paid  off. There was  a  good  rebound  in  the  commercial property market in 2010 and into the first quarter of 2011.

 

SPRING 2011 | OFFICE

market indicators

spring 2011

vacancy net absorption inventory rental rate

GMA Office Market OverviewAs we conclude the first quarter of 2011, economy-wide confidence is beginning to trickle down to the Greater Montreal Area (GMA) office market. After nearly two years of unpredictability in the suburban market, and rough seas for Montreal’s downtown market, the GMA seems poised for a return to stability and steady growth. 

Despite an overall negative net absorption of a little less than 70,000 square feet over the last quarter of 2010 and the first quarter of 2011, Montreal’s office market is abuzz with transactions large and small, and both the  investor and the brokerage communities are optimistic about prospects for the months to come. 

Rental rates are near all-time highs, and vacancy rates are expected to fall  throughout  the year, as the downtown market gets ready to welcome a new office tower, the first in years. Meanwhile, the suburban market is adjusting to the effects of recent construction, and some of the tighter submarkets will forge ahead with further construction. Despite the lure of relatively inexpensive new space in the suburbs during the recession, there is still a strong pull towards the downtown core. This can be attributed to the downtown core’s historic dominance over the suburban market and to continued investments in public transit.

 

Hudson Bay

NorthAtlantic Ocean

MANITOBA

ONTARIO

QUEBECSASKATCHEWAN

ALBERTA

BRITISHCOLUMBIA

NORTHWESTTERRITORYYUKON

TERRITORY

NUNAVUT

NOVA SCOTIA

NEWFOUNDLAND & LABRADOR

NEWBRUNSWICK

Nanaimo

Vancouver

FortMcMurray

Edmonton

Calgary SaskatoonWinnipeg

Regina

Kelowna

SurreyVictoria Waterloo Region

Toronto

OttawaMontréal

Burlington

Halifax

Moncton

CANADA

UNITEDSTATES

UNITED STATES

-5%

0%

5%

10%

15%

20%

-500

0

500

1000

1500

2000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Squa

re F

eet (

thou

sand

s)

Net New Supply Absorption Vacancy Rate

8.2%

new supply, absorption and vacancy rates

Source: Colliers International, April 2011

Downtownthe marketBy and  large,  the downtown Montreal office market closed out 2010 on a high note, and early  in  2011,  it  continues  to  show  signs  of good  things  to come. Led by  the downtown core, which has now seen positive absorption three of the last four quarters, the market is tightening and appears  to be on  the cusp of a  flurry  of  activity.  Already,  several  recent moves—most  notably,  nearly  half  a  million square  feet  taken  up  by  Hydro-Québec, AMT,  and HsBc—have  contributed  to  stable vacancy  rates  (which  are  hovering  at  just above 7 percent) and steadily rising average asking  rents  across  the  downtown  market. Many  analysts  believe  the  vacancy  rate  is heading toward 6 percent, widely considered to be the “break-even” point after which new towers must be built. For now as the pace of transactions  slowly  picks  up,  it  continues  to be  a  tenants’  market  and  many  companies, notably American corporations, are still making tentative, short-term decisions. it is also worth noting that if we exclude cGi solutions’ long-awaited move out of Old Montreal’s 111 Duke building  in  January,  the  downtown  market posted approximately 120,000 square feet of positive absorption in the first quarter, putting it on par for a good year.

trendsDespite  less  than  stellar  first  quarter results,  the  solid  position  of  certain market  fundamentals  as  we  enter  2011 suggests  that  the  health  of  the  downtown office  market  is  trending  upwards.  pent-up  demand  is  beginning  to  be  unleashed, especially in smaller spaces, as downsizing and rationalization level off. Although rents are on the rise, construction and relocation costs  remain  very  nearly  prohibitive.  As a  result,  many  landlords  have  recently succeeded  in  securing  12-36-month  lease renewals.  With  the  economy  readying  to turn  the  page  on  the  recession  existing space  may  soon  reach  its  limits.  We  are already  seeing  this  phenomenon  at  some prime  office  locations,  where  very  low vacancy  rates  are  partly  responsible  for rising  rents.  coupled  with  indications  that more and more companies are eyeing office space in Montreal,  this shines the spotlight on the 3.2 million square feet of proposed construction in the downtown core that has been  on  the  radar  since  the  third  quarter of last year. indeed, several companies are vying to put up the first new office tower in Montreal since the cité Multimédia complex  

in  2002-2004,  the  first  privately  funded tower  in  recent  memory.  in  February,  Rio Tinto Alcan confirmed that it is seriously considering  building  a  200,000-square foot,  LeeD®-certified  campus  rather  than renovating  the  existing  Maison  Alcan campus,  as  the  company  had  announced in  2007.  such  a  bold  move  could  inspire others to follow suit. The caveat here is that on the flipside of the upsurge in demand is a significant amount of shadow space; how much of this space is out there and when it will come onto the market is unknown. investmentThere continues to be plenty of liquidity in the market, however there is a shortage of quality product and alluring capitalization rates. One noteworthy  exception  is  2020  University,  a 26-storey office complex owned by canderel and  Wafra,  located  above  the  McGill  metro station.  The  building,  whose  chief  tenant is  Axa  Assurances,  is  under  contract  to industrial Alliance, with a reportedly low cap rate.  elsewhere  downtown,  the  only  major project  that  could  have  an  impact  on  the income  property  market  is  the  construction of the McGill superhospital. This project may 

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the market To an even greater extent  than downtown, most movement in the suburbs is happening in smaller spaces. This helps to explain why despite recent construction and slowly but steadily  increasing  vacancy  rates,  there  is limited availability for  large users requiring more  than  50,000  square  feet.  Although it  doesn’t  appear  so  at  first  glance,  the suburban  office  market  is  surprisingly tight.  Given  the  suburban  office  market  is so  much  smaller  and  more  responsive  to minor  shifts  than  the  downtown  market, and its submarkets much more independent of one another,  it  is difficult  to  identify any dominant  trends  that  apply  across  the board. The  loss of a few major tenants on the east island and in Laval pushed vacancy rates  up  significantly  in  these  submarkets, and there remains very little class A space available anywhere in the suburbs. New and proposed construction is also struggling to keep  up  with  demand.  A  112,000-square foot office complex on the West island built on speculation by Triad is 75 percent leased, while  two similar-sized buildings are going up on the West island and in saint-Laurent, one  of  which  will  usher  in  its  first  tenants 

as early as this spring.  in saint-Laurent the huge  Technoparc  is  also  expanding  again, with 60,000 square feet under construction for a single tenant.trendsOver  the  course  of  the  past  year,  the suburban office market  has witnessed  the interesting  combination  of  new  inventory, climbing vacancy  rates,  and surging  rents. Despite  the  200,000  square  feet  of  fresh space on  the market,  and with over half a million square feet known to be on the way, the  average  rental  rate  in  the  suburbs  is nearly $0.25 per square foot above where it  stood  at  the  beginning  of  2010.  As  a result, Laval and the West  island will  likely be  seeing  a  construction  boom  this  year, while the south shore is busily looking to fill existing space.  in contrast,  the east  island, in the wake of two major deals in the petra Towers, is expected to be rather quiet.

Lots of activity  is anticipated in the medium term  in  Laval:  The  Tour  st-Martin,  due  for spring 2012, boasts  129,000 square  feet of office space in the heart of Laval’s business district,  while  large  chunks  of  office  space will be available in and around smartcentres’ 

Suburbs

result in the sale of space currently occupied by  other  downtown  hospitals,  as  well  as fresh  investments,  as  satellite  clinics  seek to relocate closer to the future hospital. forecastThere is a general consensus in the brokerage community  that  2011  will  see  all  major downtown office real estate indicators stay out of the red for the first time since 2008. A 0.5 percent drop in the average vacancy rate is forecasted, which, given how tight the market already is, should continue to nudge rents  upwards.  The  scale  of  the  expected positive  absorption  is  difficult  to  peg  with much  certainty,  however  based  on  local growth alone, the total increase in occupied space  would  likely  remain  under  400,000 square  feet.  The  key  variables  that  could throw off this prediction include the amount of shadow space that comes to market this year, the decision of companies to relocate part of  their operations  to Montreal, and a potential brazen move by Rio Tinto Alcan, or others to consolidate their workforce under one roof in the city.

vacancy and availability rates according to market sectors, leases and subleases

Source: Colliers International, April 2011

0%

2%

4%

6%

8%

10%

12%

14%Sublease Vacancy Rate Total Sublease Availability Direct Vacancy Rate Total Direct Availability Rate

CBD DT East DT West Old Mtl St-Laurent West Island

CenterWest

CenterEast

EastIsland

Laval SouthShore

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maRkEt REPORt |  spRiNG 2011  |  OFFice  |  MONTRÉAL

CONtaCt INFORmatION

andrew maravita Managing Director Montreal Region +1 514 764 8180 andrew.maravita@colliers.com

480 offices in 61 countries• $1.9 billion USD in revenue

• 15,000 employees

• 2.4 billion square feet under management

• $154 billion USD in completed transactions over last three years

Information contained herein has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, express or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/ or its licensor(s). © 2011. All rights reserved. Colliers International (Québec) Inc.

www.colliers.com/montreal

trends (continued)

230,000-square  foot  shopping  complex on  Daniel-Johnson  and  the  Université de  Montréal’s  Laval  campus.  The  south shore on the other hand, is one of the rare submarkets  in  which  demand  cannot  quite keep  up  with  supply;  two  75,000-square foot spaces are available in Longueuil. These spaces include catania’s new building put up on  speculation which  is  looking  for  its  first lead  tenant,  and  three  recent  constructions in Brossard. in a testament to the perceived health of the south shore office market, there are unconfirmed rumours of a new tower to be built at Quartier Dix30. 

As  the West  island  has  recently  seen  a  lot of negative absorption in the pharmaceutical industry, the reported possibility of a takeoff in sales of Bombardier’s c-series jet seems to  have  come  true.  The  company  recently announced firm and option orders  together worth  up  to  $9.5  billion,  which  will  create sizeable space needs on the West island.

investment

High-quality  investment  product  continues to be in short supply in the suburban office market, despite the fact that many investors are  eager  to  take  advantage  of  renewed economic growth before market values fully recover, and capitalization rates fall back. 

The  only  notable  recent  transaction  was cominar’s purchase of the 136,000-square foot  positron  building  in  côte-des-Neiges for  $12.2  million,  at  a  cap  rate  of  8.4.  in Montreal, demand is high for both single and multi-tenant buildings, and investors should act swiftly when opportunities come to the market, before cap rates begin to drop. it is predicted cap rates could drop as low as 5.7 to 5.9 throughout 2011. 

forecast

While growth rates will vary greatly between submarkets  over  the  next  three  quarters, vacancy  rates  are  widely  expected  to stabilize  in  the  suburbs,  which  along  with trends  already  observed  over  the  past  18 months,  should  exert  upward  pressure on  rental  rates. Despite  a  slew of  positive economic indicators, tenants are hesitant to commit to long-term leases, as they wait for their  own  businesses  to  stabilize.  in  parts of  the  suburbs,  including  the south shore where  construction  continued  throughout the recession, growth will be more subdued as the focus shifts to filling vacant space in new buildings. The bulk of other transactions is  expected  to  occur  in  smaller  5,000  to 10,000-square foot spaces. Both downtown and  in  the  suburbs  however  forecasted economic  growth  and  construction  in  the industrial,  retail,  healthcare  and  education markets should have a ripple effect on the office  market  and  contribute  to  an  overall positive year.

maRkEt REPORt | SPRING 2011 | offIce | MoNTRÉAL