Montreal commercial real estate market update – Q2 2023

Commercial investment activity in the Greater Montreal Area (GMA) market area continued to slow down in Q2 2023, with $2.1 billion in investment volume representing a 15% decrease compared to Q2 2022. For the first half of 2023, transaction volume has fallen by over half when compared to the first six months of 2022. Renewed interest rate increases, rising construction costs and labour shortages have led to uncertainty and waning optimism as investors rebalance their portfolios with more stable, low-risk areas of real estate such as residential and industrial. However, sectors such as ICI land, retail and office displayed resiliency this quarter with increased investment activity due to large transactions from private investors.

Figure 1 - Montreal market area: Property transactions - All sectors by year

The apartment sector recorded a decline in investment volume to $753 million, down 37% from Q2 2022, due to previously mentioned overarching challenges shadowing major markets across Canada. However, demand in the residential sector remained high due to limited supply in the market. According to Altus Group’s latest Investment Trends Survey, suburban multi-unit residential in Montreal jumped to second place as a preferred product and market combination by investors in Q2 2023, after suburban multi-unit residential in Toronto.

Office investment transactions posted $246 million in Q2 2023, a 50% increase year-over-year due to several Class A office transactions from private investors. Availability rates held steady at 18.2% from the previous quarter but remain high year-over-year. Moreover, the trend towards high-quality Class A office buildings by tenants has not only led to decreased leasing activity in Class B and C buildings but has also increased available sublet space from 2.96 million square feet to 2.98 million square feet as tenants sought to right size their space. Furthermore, no new supply entered the market. However, 1.5 million square feet of office space is under construction, with 69.3% pre-leased.

The industrial sector reported $488 million in dollar volume, marking a 16% drop year-over-year. The GMA market saw 1.9 million square feet of new supply entering the market, with about two-thirds pre-leased, which resulted in an increased availability rate of 4.5%, a 0.9% increase year-over-year. Moreover, the market has over 2.9 million square feet of industrial space currently under construction, with almost half pre-leased as supply remained limited.

Montreal’s retail sector rallied with $263 million in investment volume, a 53% increase year-over-year. This increase in investment activity is mainly due to the purchase of several community-level shopping centers and car dealerships. Furthermore, the market sought entertainment spaces, luxury retailers, grocery anchors and pop-up store concepts to occupy its vacant spaces.

Figure 2 - Montreal market area: Property Transactions by asset class (Q2 2022 vs. Q2 2023)

Investment transaction activity is expected to remain muted as investors navigate the high-interest rate environment. In addition, labour shortages, limited developable land, and the rising cost of construction and materials are some of the additional challenges that contributed to a slow first half. In the face of these challenges, Montreal has demonstrated resiliency, as industrial and multi-family residential assets have continued to make up the majority of investment activity in the market. In addition, the retail and office sectors contributed to recovering investment activity this quarter.

Figure 3 - Montreal market area: OCR trends across 4 benchmark asset classes

Notable Q2 2023 transactions

3080-3100 Le Carrefour Boulevard – Office

A Cominar REIT and Investissements Caracal office portfolio deal sold for $67,500,000. The seven office buildings, which had a combined gross leasable area of approximately 503,977 square feet, sold for an aggregate price per square foot of $134. The office buildings are spread across differentiated urbanized areas, with four buildings located in Laval’s economic centre and the remaining three properties located in the suburban markets of Pointe-Claire and Bois-des-Filion.

1245 Sherbrooke Street West – Office

1245 Sherbrooke West, the former Standard Life office building, is an example of the effects of the pandemic on unused office space in downtown Montreal. Sold for a whopping $49,850,000 between Manulife and NexArm Investments Inc., this vacant office building will be converted into residential units. The 21-storey building contains a total net rentable area of 217,377 square feet, representing a price per square foot of $229.

Joie de Vivre – Apartment

The largest apartment deal of the second quarter was reported in Saint-Laurent. Previously owned by CapReit, the Joie de Vivre apartment complex, comprised of 135, 145, and 155 Deguire Boulevard, sold for $68,900,000, with 360,000 square feet and 393 units representing a price per unit of just over $175,000.

3701 Gaumont Road – Industrial

The new construction of 3701 Gaumont Road in Laval was the highest seller in its asset class. With a sale price of just under $65,000,000, its 192,000 square feet represent a price per square foot of $337. Located just south of Autoroute 440, this new building is set to house Yokohama Tires’ distribution centre for Eastern Canada.