Montreal's Office Market Sees the Largest Amount of Tenant Demand on Record
05 Feb 2018
Tenants leased an additional 1.93 million square feet of office space in 2017, breaking 2007's previous record
A growing economy, record low unemployment and a strengthening technology sector drove Montreal's office tenant demand in 2017 to a record high. According to CBRE's Canada Q4 2017 Quarterly Statistics Report, in 2017, Montreal saw over 1.93 million square feet of positive absorption, the commercial real estate industry's measure of tenant demand, breaking the previous record of 1.8 million square feet set in 2007. This increase in demand comes amidst rising asking rents in Montreal which have increased 4.8% year-over-year, to $22.22 per square foot for Class A downtown properties as of Q4 2017. High tenant demand and a scarcity of large blocks of contiguous office space will go on to drive rents higher in 2018. This will start to shift negotiating power away from tenants and the stage is being set for Montreal's office market to potentially become the first 'landlords' market' in over 20 years.
"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. Earlier last year we saw Montreal's industrial market shift to become a landlord's market and now we're seeing the same phenomenon within the office market. Cycle back 18 months, and generous tenant inducements such as periods of free rent were the norm. Today, inducements have been scaled back and, after years of stagnation, rents are rising and are expected to increase again in 2018," commented Avi Krispine, Managing Director of CBRE Quebec.
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.
In an increasingly tight market, large blocks of contiguous office space are becoming scarce. 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%, with the downtown market in particular dropping 90 basis points to 9.7%.
"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. 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," added Krispine.
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