Canada’s commercial real estate sector looks to be performing strongly. Indeed, according to Colliers Internationals’ Canadian Office and Industrial Markets Q1 2017 report, Vancouver in particular appears to be a commercial hub gathering momentum. The British Columbia heartland has the most office construction underway out of any Canadian city.
The report also points towards solid demand for industrial space, with 1.2mn square feet (sq ft) of space absorption in the first quarter of this year. The signs are positive, and points towards Canada as a stable place to do business.
According to Jean-Marc Dubé, SIOR Senior Vice-President at Colliers International, based in Montreal, one should look back at the way Canada weathered the global financial crisis. “Canada came through better than most partly because we are systemically conservative! Our banking system is set up in such a way that is harder for individuals and businesses to over-leverage and our regulatory framework did not allow a subprime bubble to develop.” It is hardly surprising that the Bank of England looked to a Canadian banker when looking for a governor to steer it though troubled times.
Economic up’s and down’s
Perhaps the biggest challenge for the economy in general has been the drop in oil prices and the manufacturing downturn, Dubé suggests. “That impacted our business significantly in the west of the country. At $120 a barrel, all of our offices were strong, especially in Alberta. We were seeing unprecedented office deals done in Calgary and Edmonton. Then when the oil price crashed and interest rates fell back, these were the areas where business slowed the most.”
That is all in the past, and Alberta is now doing well. The major office markets in Canada, Vancouver, Calgary, Edmonton, Toronto, Ottawa, and Montreal, equate to 476mn sq ft of inventory – 89% of the entire country. In the past, Montreal, just 500 km from Toronto, tended to be less attractive to investors, something Dubé admits has something to do with its different market and business culture.
“We have not in the past had the same level of Chinese investment, so to date Montreal has not exploded quite like the other cities.” Ironically, it's this very fact that is giving Montreal a huge impetus right now. Frankly, the business hegira to Toronto, which has become one of the world's 'alpha' cities on a par with the likes of London, San Francisco, Singapore or Dubai, has made it almost unaffordable. Montreal is seen as a place business can still locate with all the advantages but at a more affordable price, and activity is ramping up rapidly, including foreign investment.
Colliers' business model depends on the volume of transactions it is involved in, whether over property acquisition, brokerage, tenancy and leasehold agreements or consultancy. The company is an essential partner for real estate investment trusts (REITs), major corporations, government departments, local authorities and investment agencies – anyone, in fact, with an interest in developing land.
This is why Montreal is such an exciting place to be in today. What attracts an investor is the capitalization rate, the ratio of net operating income (NOI) to property asset value. “The higher the cap rate, the more attractive it is to the investor. We have been seeing 6.5% to 7% in Montreal but a lot less in Toronto, where an 800,000-square-foot building just sold for less than a 4% cap rate. An investor can secure excellent premises in Montreal and still make a much bigger return,” Dubé explains.
Speculative buildings and repurposing
One of the things that has been hurting Montreal is a shortage of inventory. There are very few buildings for sale, Dubé comments. There has been very little speculative building there as opposed to the greater Toronto area (GTA), where recently some 9mn sq ft of space was under construction without pre-agreed tenancy. “Spec building is riskier,” he explains. “If you don't get a tenant you are going to be on the hook for all the expenses as well as the financing costs of the property. The fear in Montreal was that the big corporations looking at taking up to a million square feet were all focused on the GTA.”
Now Montreal is beginning to see developers breaking ground on speculative projects. The city is also growing in importance as a technology hub, and this is driving an exciting new development involving the repurposing of former industrial buildings. A good example is the former Johnson Wireworks building now called Lofts Wireworks located at St-Henri in the Sud-Ouest of Montreal. This old factory is in an area that is being redeveloped with multiple cafés, bars and restaurants only minutes from the new Montreal Super Hospital and Place St-Henri Metro. Yet, it offers offices between 1,680 and 29,845 sq ft for a lot less than what you would pay in Toronto. Dubé has seen the project through from the early stages of negotiation with the developer: “I helped the client acquire the building, go through the process of repurposing the building and brought it back to the market as flex loft office space. Now I am working on locating the tenants and negotiating the transaction.”
Now this single tenant building will lease approximately 25 businesses. Some will be high technology businesses, some startups - there will be co-working space, as well as Montreal's first makers’ space called Espace Fabrique, where early-stage companies can take their first steps from concept to prototype. “Historically known as being the manufacturing centre for Canada, Montreal is moving towards being the high-tech centre of the country,” Dubé says. Montreal, Dubé adds, is becoming one of the top cities in the world for the gaming industry. Many of the city's old textile factories are being completely restructured to meet this new type of demand.
On the industrial side, large spaces are still needed and given the lack of inventory of buildings 300 000 sq ft and over, it's better to build new. Newer constructions might go up to 32 ft of clear height, but a new distribution centre being put up by Broccolini Construction on the outskirts of Montreal is 120 ft from floor to deck. Clearly, robots will have to do all the picking, as the building will be completely automated. This represents a transformation of the real estate market, specifically concerning employment.
In addition to brokerage, the firm has large property management teams as well as one of the largest project management groups in Canada – a team that can oversee the construction of any large asset like a hospital, for example. Colliers also has a robust IT department that has developed a proprietary countrywide platform, as Dubé explains: “CRM+ allows us to communicate and understand what our colleagues are doing – for example, I can see if a colleague in Mississauga is working with a certain company. It helps our clients too by ensuring a truly joined-up interaction with them.”
Seamless communication across vast distances serves the Canadian real estate industry's new realities. In the past, 10-year leases were common but in the fast-moving tech environment mentioned above, that is too long. Clients are looking for flexibility, short-term leases of five or even three years suit fast growing companies better. Larger companies are also reviewing long-term leases, which, under new accounting rules, are treated as capital assets affecting the balance sheet. “Many larger companies don't want long-term leases and will have a corporate strategy of signing shorter terms,” Dubé adds.
Quicker turnover properties mean a greater volume of transactions and Dubé and his team are confident that growth in the Canadian commercial and industrial property markets will continue for some years, and that Montreal will take up much of the slack. His early career was in teaching so it's no surprise he has a passion for training the new generation of young advisers and brokers. “I believe no time is wasted when you are learning something new. This is a people business: I sell knowledge and relationships!”