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| Population 3,721,000 | ||||
| Employment 1,892,000 | ||||
| Unemployment Rate 7.3% | ||||
| Retail Sales $42.5 billion | ||||
| Consumer Price Index 2.5% | ||||
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| ↑ | Office | ↓ | ||
| ↑ | Industrial | ↓ | ||
| ←→ | Retail | ←→ | ||
| Overall Cap Rates ↑ |
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| Source: DTZ Barnicke | ||||
| 2007 | 2008e | 2009f | 2010f | |
|---|---|---|---|---|
| Real GDP* | 2.5% | 1.7% | 1.1% | 2.9% |
| Population* | 0.7% | 0.7% | 0.8% | 0.9% |
| Employment* | 2.5% | -0.5% | -1.0% | 1.3% |
| Unemployment Rate | 7.0% | 7.3% | 7.7% | 7.6% |
| Personal Income per Capita | $34,162 | $35,003 | $35,530 | $36,718 |
| Total Housing Starts | 23,200 | 23,300 | 19,000 | 18,100 |
| Retail Sales* | 3.4% | 4.0% | 3.9% | 3.9% |
| CPI* | 1.6% | 2.2% | 1.7% | 1.9% |
| Source: Conference Board Canada | *Percentage Change from Previous Year | |||
Market overview
Montréal’s economy expanded by 0.7% in 2008, marking its slowest year of growth compared to the last five years. Ongoing decline in the manufacturing sector has been brought on by slowing demand from a receding global economy and a stronger Canadian dollar. Fortunately, Montréal’s reputation for R&D performance continues to support the economy, generating growth in the life sciences, information technology, telecommunications, and professional services industries.
The aerospace industry remains an exceptional performer in the manufacturing sector. Companies like Bombardier are experiencing tremendous growth due to growing demand from emerging markets like China despite the global economic turmoil. Bombardier is attracting significant demand for its CSeries planes, which are assembled at the Mirabel Airport, outside of Montréal.
Also driving the economy in Montréal is investment in infrastructure, healthcare and tourism, including $3.6 billion on various hospitals; $1.5 billion on the Turcot interchange; $750 million on the Notre-Dame Street modernization project; and $1.9 billion on the Quartier des spectacles project. Non-residential construction and a slight revitalization in manufacturing due to a weakened dollar are expected to boost GDP growth to 1.1% in 2009.
The growing consumer spending met with a lack of international expansion and a halt in new developments is creating a lucrative environment for established retailers.
Office
2008 began well with a 90 basis point drop in vacancy in Q1. Unfortunately for the remainder of the year, the vacancy rate climbed back to Q4 2007 levels at 8.4% partly due to the completion of five new buildings adding 890,000 square feet to the total inventory.
Looking forward, overall vacancy rates are expected to climb slightly in 2009, with the exception of Class C space, which will see a slight decline in vacancy as tenants seek lower rates in response to economic uncertainty. Overall activity will slow in 2009 as tenants withdraw from early renewals or new deals, until a clearer picture of the future economy is determined.
Significant projects in 2009 will be the 200,000 square foot, LEED Certified, Tour Catania; the 235,000 square foot second phase of the Bell Campus; 90,000 square foot Parc d’affaires sur le Golf; and 5,455 de Gaspé Street with up to 600,000 square feet. With the exception of a few projects, a discrepancy between rental rates and construction cost continues to make it difficult to justify new office tower projects. Consequently, there is a growing trend of old industrial buildings being converted to loft style office space. This space is being brought to market at comparatively low rental rates and could further deter any new development plans as the converted industrial space places more downward pressure on overall rental rates.
Rental rates in 2009 for Class B and C product will depend heavily on the rate at which industrial building conversions take place. Although at historically low vacancy levels, rental rates for Class A product will not increase in 2009, but rather will remain stable due to economic uncertainty.
Industrial
Industrial vacancy rates continued to rise in 2008 and the story is expected to remain the same for 2009. Most of the vacant space is coming from older buildings, specifically space with lower than 24’ clear heights. Buildings with 16’ clear heights and less are quickly becoming obsolete in the market.
In 2008, developers who took on the risk to build new and efficient multi-tenant speculative buildings, such as Groupe Montoni’s five building development on Kieran Street, experienced success in the market. However, in 2009 speculative developments are expected to slow in anticipation of an inactive year. Due to low lease rates, high construction cost and economic uncertainty, very few developers are undertaking speculative construction or improving existing space. Consequently, tenants are pursuing new build to suit projects to meet their needs, accelerating the growth in vacant inventory.
Most of the existing developments are situated on the Island, where the government has offered a tax abatement of up to 100% for three years to those who build new industrial facilities in that region.
Expect 2009 overall gross rental rates to remain steady as net rental rates decline, but taxes, maintenance and insurance costs escalate. This trend will further strengthen the demand for more cost efficient space and increase the perceived obsolescence of older industrial buildings. Many obsolete, multi-level, industrial buildings are being considered for conversions to loft style office space.
| Office Inventory | 78.7 million sq ft |
| Office Vacancy | 7.7% |
| CBD Class A Vacancy | 6.6% |
| Industrial Inventory | 329.0 million sq ft |
| Industrial Vacancy | 8.5% |
| Source: DTZ Barnicke and Conference Board Canada | |
Investment
The 2008 investment climate for Montréal was not much different than the rest of Canada. While the beginning of the year was as equally active as 2007, with talks of demand exceeding supply, the second half of 2008 experienced a significant slowdown brought on by a shortage of accessible capital. The limited supply and high cost of capital has forced many investors to the sidelines and simultaneously forced vendors to sell some or all of their portfolios at reduced prices.
Cap rate compression trends reversed in 2008 and cap rates for all assets are expected to rise in 2009, with industrial space increasing the most and high quality office space the least. 2009 will be a challenge for vendors who were once used to the idea of sub 6% cap rates and a great buying opportunity for those with the cash or access to debt to buy product at reduced prices.
Retail
Despite slower economic growth and declining tourism spending brought on by a strengthened Canadian dollar, retail sales in Montréal grew by 4.0% in 2008, a 60 basis point increase over 2007. In 2009, retail sales are expected to increase once again then stabilize for the next three years.
Despite the strong sales numbers, the only new major retailer to the market was H&M, and little expansion occurred from international retailers. New retail developments such as Griffithtown and the highly anticipated Lac-Mirabel were both abandoned due to trouble securing financing. Also, the redevelopment of Champlain Mall has been suspended.
The growing consumer spending combined with a lack of international expansion and a halt in new developments is creating a lucrative environment for established retailers. There is now an excellent opportunity for local retailers to expand and capture market share. Expect stable sales per square foot in 2009 and rental rates to decline slightly as demand stems mainly from local retailers.