SPRING 2012 | OFFICE

MONTRAL QUBEC
Canadian Market Overview
NEWFOUNDLAND & LABRADOR

COLLIERS INTERNATIONAL | MARKET REPORT

son Bay

QUBEC

ONTARIO

Ottawa

Montral

The Canadian economy grew by 2.5% in 2011 and is forecast to better that performance in 2012, with GDP growth of 2.6%. The U.S. economy looks to continue on an upward trajectory, supporting Canadas export oriented industries. With healthy balance sheets, the availability of low interest financing and access to capital through debt and equity markets Canadian Corporations are well positioned for expansion. This corporate strength is reflected in the Bank of Canadas most recent Business Outlook survey, indicating that the majority of companies plan to invest in machinery, equipment and/or additional employees. This bodes well for the health of the office market as employment growth continues. SupNOVA SCOTIA porting both retail property performance and demand for warehousing and disHalifax tribution facilities, Consumer spending is anticipated to grow at a pace similar to 2011.
North Atlantic Ocean

GMA Office Market Overview

The year 2011 was an exhilarating one for the Greater Montral office market. Annual net absorption in the region exceeded 900,000 square feet, paving the way for a return to pre-crisis levels after one year of negative absorption. The market slowed, however, during the first quarter of 2012. To date, annual absorption for the Greater Montral Area (GMA) has nevertheless reached nearly 260,000 square feet, due primarily to the recent occupation of a number of small spaces in the suburbs. Of all the regions submarkets that were studied, except for Downtown, the South Shore is the most vigorous, both in terms of the declining vacancy rate and the number of office buildings currently under construction. The availability rate in all sectors and classes dropped from 8.1% to 7.8%, slightly reducing total available area. In short, the market is still tightening and good quality office space in the downtown core is increasingly difficult to come by. If the positive absorption trend continues, new supply slated for this year will not be sufficient to meet market needs and we should observe a greater number of loft-type building conversions. Signs of dynamic growth can be seen downtown, contrary to the popular belief that it is emptying out due to delays caused by crumbling road infrastructure.

MARKET INDICATORS

Burlington
SPRING 2012

VACANCY NET ABSORPTION INVENTORY RENTAL RATES

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MARKET REPORT | SPRING 2012 | OFFICE | MONTRAL

Downtown
THE MARKET

TRENDS

INVESTMENT

Downtown finally started to show signs of vitality at the close of 2011, with annual absorption approaching 800,000 square feet. The market is a landlords market and it is continuing to tighten, whereas downtown office vacancy rates are still dropping, having reached 5.4% at the end of the first quarter of 2012. The availability rate also declined slightly from 6.9% at the end of 2011 to 6.7% at March 31, 2012. That said, total area available for sublease has increased to almost 400,000 square feet. This sublease rate, which represents less than 1% of the entire downtown inventory, is still not very high compared to the standard 500,000 square feet., A number of significant transactions took place during the quarter, such as SNC Lavalins rental of 40,000 square feet at 2015 Peel. In addition, the Peoples Republic of China is set to establish its Consulate General in Montral in the fall in approximately 45,000 square feet rented at Complexe du Fort (2100 Ste-Catherine West). Class A and B premises have seen a half-percent rise in net rents, but the impact of this increase is less than the rise in occupancy levels.

Many financial companies and law firms with downtown addresses are expanding and on the lookout for quality spaces in the heart of the city. A number of new spaces have been put on the market, such as 1350 Ren-Lvesque West where CGI made more than 100,000 square feet available for sublease as part of its right-sizing activities. As indicated above, vacancy levels maintained their downward movement, and should soon reach the threshold level of 5% if the trend continues. It will be necessary to put up new towers to accommodate absorption at this point, especially considering that the newest AAA spaces downtown are already twenty years old. However, neither of the two buildings with large office areas currently under construction (Viger Tower and lot 10 in Griffintown) will be completed before 2013. The current trend downtown appears to be that large spaces are snapped up as soon as they are made available for direct leasing. Accordingly, the Sunlife buildingwhich posted an availability rate exceeding 15% in the fall of 2011is now almost full, with only 3.5% of its area on the market following the signing of a major lease with Public Works and Government Services Canada. Rent increases generally follow decreased vacancies, but in this case the increase in rents was minor, whereas additional rent expanded somewhat.

As usual, liquidities are abundant and capitalization rates are stable and encouraging, and so major buyers are keeping an eye out for potential acquisitions. However, there is a shortage of quality products on the market at the moment. A number of major transactions have been concluded in the downtown core since the start of 2012. For example, 615 Ren-Lvesque West was purchased by Groupe Alfid/Cromwell Management from Ravad Trust for $13.7 million. This 12-storey office building offers an area in excess of 80,000 square feet. Given the demand for profits from investors, any quality building or portfolio should quickly find a buyer.
FORECAST

Although Montral is experiencing a construction boom, with two mega-hospitals underway and two other hospitals being expanded, along with a multitude of condominium projects, the situation is totally different for office towers. The downtown vacancy rate has reached 5.4% and availability stands at 6.7%. New office towers will have to be built to accommodate the absorption expected in the coming years. Pre leasing projects are not lacking, but they are all waiting for major tenants who can commit to larger spaces and higher rent. However, the downtown Montral skyline is bound to change in the next few

NEW INVENTORY, ABSORPTION AND VACANCY RATES

Net New Supply Absorption Vacancy rate

2500

25%

2000

20%

Square Feet (thousands)

1500

15%

1000

10%

500

5%

0 1999 -500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (YTD)

0%

(5%)

-1000

(10%)

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| COLLIERS INTERNATIONAL

Source : Colliers International, March 2012

MARKET REPORT | SPRING 2012 | OFFICE | MONTRAL

years. Two buildings under construction will include a proportion of offices, but they are mixed-use projects that also include residential condominiums. This concept, which is widely seen in Europe and emerging in the United States, has yet to gain acceptance among companies seeking office space in Montral. The Kevric project, the Viger Tower, should find an occupant to justify its existence, and Canderel is set to announce a project for the Quartier des spectacles in the short term. All of these projects will take several years to complete. At this rate, given the trend of positive absorption currently observed in the downtown core, a new inventory will soon become essential unless major spaces are freed up unexpectedly.

Suburbs
THE MARKET

namic submarket outside of downtown is without a doubt the South Shore. More than 86,000 square feet were absorbed in this sector, to the extent that the vacancy rate plunged from 11.2% to 8.0%. With two office towers under construction, and considering the new inventory delivered in 2010 and 2011, there are clear signs of vitality. The South Shore has unquestionable appeal. Television station TVA just leased two floors (30,000 square feet) of 1010 de Srigny in Longueuil. In the West Island, an additional 30,000 square feet of Class A space is now vacant, negative absorption having been offset by almost the same amount of rented and occupied Class B small spaces. Absorption in this sector is slightly negative and the vacancy rate stands at 12.3%, which is close to the availability rate of 13%.
TRENDS

Suburban Montral posted positive absorption exceeding 180,000 square feet at the end of the first quarter of 2012. All suburbs, with the exception of the West Island, are experiencing positive absorption, which points to a continuation of the trend seen at year-end 2011. As a result, the vacancy rate dropped from 9.8% at the end of last year to 8.7% at the close of the first quarter of 2012. The availability rate also declined slightly during the first quarter of the year, from 10.7% to 10.3%. The GMAs most dy-

Although growth is the name of the game in the downtown core, companies with offices in the suburbs are in consolidation mode. For example, pharmaceutical company GlaxoSmithKline is in the process of consolidating its space and had a building put up in Laval. Suburban Montral is still showing encouraging signs, with vacancy rates dropping throughout, except for the West Island. That being said, Liberty Sites just finished the construction of a building in Saint-Laurent for Volkswagen Fi-

nancial Services that should be occupied shortly. According to the dictates of the market, when occupancy levels rise, net asking rates per square foot should rise as well. Although there is lack of consistency among the submarkets, average net rent for Class A spaces is $13.29, posting a minor half-percent increase. Class B spaces show more significant growth, with net rent currently averaging $11.82 up 12%. Net rents are highest on the South Shore, where the net asking rate is $15.61 per square foot for Class A buildings. This years new inventory just might reshuffle the deck. Two office towers were built on the South Shore in 20102011, and another is due to be completed this year. Quartier Dix-30s S1 tower is slated to add 100,000 square feet of new suburban space. The eight-storey tower is already more than 60% leased. Another projectthis one 27,000 square feetis under construction in Boucherville, but no tenants have yet been found for the three storeys. Laval is also a vibrant market, posting subtle positive absorption of 4,000 square feet to date in 2012, a 3% rise in average net rents asked since the end of 2011, and a 60,000-square-foot tower under construction on Le Corbusier, a third of which is already leased.

VACANCY AND AVAILABILITY RATES ACCORDING TO MARKET SECTORS, DIRECT LEASE AND SUBLEASE
14% 12% 10% 8% 6% 4% 2% 0%

Sublease Vacancy Rate

Total Sublease Availability Rate

Direct Vacancy Rate

Total Direct Availability Rate

Source : Colliers International, March 2012

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MARKET REPORT | SPRING 2012 | OFFICE | MONTRAL

INVESTMENT

Similar to the downtown market, quality investment products are rare in the suburbs. Well placed buyers are vigilant, always on the lookout for acquisition opportunities. That being said, landlords and real estate investment trusts are holding back from putting their properties on the market and amortizing their investments to a zero book value. By continuing to manage the properties, they are assuring a more or less constant cash flow, but in the absence of any purchasing opportunities, it is impossible for them to spread themselves any thinner. Furthermore, cap rates in the 6.75-7.75 % range, the absence of other purchasing opportunities and the disruption to cash flow all discourage resale. Despite these factors, Sandalwood has announced that it is putting a large portion of its real estate portfolio on the market, starting with its office buildings on Nuns Island.
FORECAST

via public transit. There are a number of new constructions, as well as many pre-leasing projects in Laval and on the South Shore. With positive absorption anticipated in the coming quarters, many loft-type industrial buildings in the Centres East and West, made obsolete by the departure of the manufacturing industry are likely to be converted into Class B office spaces. With their low ceilings and insufficient parking ratio, these properties are unsuitable for the needs of modern industry but may present an attractive alternative for the knowledge-based industries.

512 offices in 62 countries

$1.8 billion USD in annual revenue 12,300 professionals 1.25 billion square feet under management

CONTACT INFORMATION

Andrew Maravita

Although some expected a decade marked by chaos because of road infrastructure work (such as the Champlain Bridge and the Turcot interchange) which could have led to a mass exodus of businesses out of the downtown core and toward the suburbs, this has yet to materialize. Many of these companies see considerable challenges with setting up in the suburbs, such as difficult access

Managing Director Montral Region +1 514 764 8180 andrew.maravita@colliers.com

Information contained herein has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, express or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/ or its licensor(s). 2012. All rights reserved. Colliers International (Qubec) Inc.

Glossary
The vacancy rate is the amount of vacant space divided by the existing building inventory base. Vacant space is available and physically unoccupied, and it includes both head lease and sublease space. Physical vacancy is not determined by whether or not a tenant is paying rent. The availability rate is the amount of available space divided by the building inventory base. Available space is space that is available for lease, sublease or sale, and may or may not be vacant. Space available for direct leasing is offered on the market by the landlord or property manager, whether or not the space is vacant. Space available for subleasing is offered on the market by the current tenant, whether or not the space is vacant. This space competes with space available for direct leasing. The net rental rate is the monetary value asked by the landlords for a space offered for direct leasing (not subleasing), expressed in dollars per square foot per year. The additional rent includes operating costs and property taxes, per square foot per year. The gross rent is the total of the net rental rate and the additional rent. Net absorption is the change in space physically occupied since the previous period. Net absorption can be positive or negative. Pre-leasing activity is not included in the calculation of net absorption since it does not imply a change in vacancy status.

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