Tenants rule as space abounds in downtown core

By Robert Frank

A perfect storm is converging in downtown Montreal, just as ample new office space is about ready for delivery.

“We face a softening market and an abundance of sublease—or gray market—space,” said Lloyd Cooper. “We’re not tracking close to 800,000 sq.ft. of sublet space, market-wide. So there is fear out there.”

“With hundreds of thousands of square feet of pending inventory to hit the market 2015-2017, coupled with the Heenan Blakie meltdown, Montreal has become very much a tenants’ market,” concluded the Cushman & Wakefield vice-president. “Coupled with the slow economy and political pressure, this has put landlords on edge.”

Meantime, a parade of players—big and small—are marching out of the city centre.

“Midtown is taking tenants out of the downtown core who don’t need to be there,” Cooper underscored. “Tenants have already committed to more than 300,000 sq.ft. of space.”

“They’re cutting their gross rental rate in half, without accounting for paying half price on parking,” he said, “and still offering tenants proximity to public transit because they’re near the Metro and light rail.”

“Major firms like TD Bank, Royal Bank have committed to relocating their back office operations to refurbished garment manufacturing buildings,” Cooper said. “Likewise, even more small companies like Media Experts are trailblazing, moving there to save money.”

“They’re getting live-work-play joie de vivre because employees live in those areas: Mile End, Park Extension and Villeray,” he added. “That just puts more pressure on the downtown core.”

The dynamic could make it costly for owners of second-tier properties to remain in the game.

“Owners of B properties are under pressure to upgrade,” Cooper observed. “The new towers that are about to be delivered are LEED platinum and gold. So B-class owners have to invest in bringing their product up to date with new elevator systems, upgraded lobbies and toilets and base building components—without necessarily getting greater return on their investment.”

“They’re just treading water to maintain their occupancy rate,” he concluded.

Note: This report appeared on page 30 of the Spring 2014 issue of Canadian Real Estate Magazine.
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