Challenges & opportunities for the Montreal office market
April 21, 2023
By: Jean Laurin, Principal & President, Québec
Clearly, the economic climate of the city of Montreal has been rebounding in the past year, but it has not reached the expected level we are all hoping for. However, there are positive signs in terms of revitalization, the return to the office and other indicators.
Compared to the last couple of years and in general, the city is being revitalized. Traffic is back, due to the added number of vehicles on the road and sometimes caused by construction and infrastructure improvements. For people in the real estate business those orange cones actually are a good sign!
Travel is up significantly. Both the main train stations are seeing increased traffic as is Trudeau Airport. Some expect this summer’s tourist business will set a new record.
Construction continues to be active in the residential sector, although we expect a slowdown for the start of newer projects at least until the mortgage rates stabilize.
The various levels of government have yet to react to defining back to work policies, but the time for them to act is now and that may lead to further positive indicators for the real estate industry and for the economy.
Back to the office
There is an increasing number of major corporations which are requiring employees to come back to the office or are coaxing them back with an augmented office experience. This may create a wave of human resources returning to the workplace.
Employees continue to have a major impact on the occupancy of space in buildings downtown and decision makers are looking for the right balance for the benefit of the business. When and where employees choose to work has changed, and it has changed for good. Finding the right solution between remote work and work in the office will be the key as we shift away from either/or to an equilibrium that includes both.
Working from home has helped productivity for certain types of activity, but collaboration and innovation are most efficient in person for most businesses. As more people return to the office, the FOMO (fear of missing out) effect of being at home when others are in the office will gradually reassert itself, encouraging people back into the habit of being mainly in the workplace unless they have a specific reason not to be.
Rising unemployment and a weaker economy will make many people want to ensure that they aren’t just working, but that they are also seen to be working.
Impact on real estate
The impact for office building owners has been major. First, it has affected the operational aspect of dealing with Covid conditions, then reduced occupancy and rent reduction. The new reality of what office tenants need and want, how they occupy space and the amount they require are factors executives are having to deal with post-pandemic.
Most tenants understand that the quality of the building makes a difference. The very best trophy buildings have almost 10 percent higher occupancy while poorer quality buildings suffer significantly. In better buildings, not only is vacancy down, but more importantly for owners, rents are higher. Tenants realize that better buildings offer improved services, are perceived to provide better value and are seen as more attractive to employees in terms of comfort and amenities and are therefore more attractive to upper management who want a stronger presence enabled by a prestigious location.
In addition, the choice of building is starting to focus on the most environmentally-friendly properties, as the younger generation of employees are more demanding of buildings than their predecessors. Institutional owners are forced to review their position with older assets as they need to report how they fare with ESG conditions.
Opinions on the fortunes of the office sector are divided. For those who believe that we will see a long-term return to the workplace, the valueadd opportunity is to reposition those secondary assets to take advantage of strong occupier – and employee - demand for the best, most sustainable buildings. This is not without risk, but with the repricing that we expect to see coming through ever more clearly, it could well be justified by the return. More and more, the concept of conversion of office buildings to residential occupancy appears to be attractive. However, it’s not that simple. If it’s to be considered, it’s likely for class B and C office buildings. The reality is that for 90 percent of buildings, it is not an option because of current occupancy and leases in place, zoning, floor size, configuration, mechanical and electrical systems requirements, costs, risk, etc. But it may work for a very small percentage of the market.
Affordable housing is and will continue to be a challenge for most big cities in North America; the solution will be a mixture of government support in either subsidies and/or tax credits. The opportunity for investors and developers is potentially to take a new financing approach to ease the pressure on the equity that’s required from buyers which can have an impact on renters as well.
On the Radar
The Montreal region continues to offer development opportunities across the board. There is no constraints on the creativity of developers except needing to deliver the right product at the right price. Activity created around the construction of the REM is visible in all regions and is the biggest driver of current and future development everywhere. The Montreal East region is ripe for development and the commitment by the Quebec government to clean some of the contaminated lands will ultimately translate into an important development activity, especially when one considers the lack of available land in the Montreal region.
An amazing development currently underway is the construction of the Royalmount project. The level of activity is not visible to Montrealers, but the quality of planning to offer a unique environment needs to be commended and will be a surprise for most once it opens. The announcement of a new world class aquarium is a strong signal of what’s ahead.
Complexe Montmorency in Laval is another project which demonstrates an interesting shift of activity in the sector. And finally, the amazing growth in the South Shore of the development of Quartier DIX30 which continues to attract attention for expansion to adjacent sites.
We are in a period of transition leasing us out of what were dark times for everyone and perhaps for the real estate industry in particular. Transitions for visionary real estate owners and managers always bring opportunities. Those unwilling or unable to respond to new realities will inevitably be left behind.