www.colliers.com/montreal

SPRING 2012 | OFFICE

MARKET INDICATORS

SPRING2012

VACANCY NET ABSORPTION INVENTORY RENTAL RATES

Canadian Market Overview The Canadian economy grew by 2.5% in 2011 and is forecast to better that per-formance in 2012, with GDP growth of 2.6%. The U.S. economy looks to continue on an upward trajectory, supporting Canada’s 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 posi-tioned for expansion. This corporate strength is reflected in the Bank of Canada’s 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. Sup-porting both retail property performance and demand for warehousing and dis-tribution facilities, Consumer spending is anticipated to grow at a pace similar to 2011.

GMA Office Market Overview The year 2011 was an exhilarating one for the Greater Montréal 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 ab-sorption for the Greater Montréal 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 region’s submarkets that were studied, except for Downtown, the South Shore is the most vigorous, both in terms of the declin-ing 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.

MONTRÉAL QUÉBEC

COLLIERS INTERNATIONAL | MARKET REPORT

Hudson Bay

NorthAtlantic Ocean

MANITOBA

ONTARIO

QUÉBECSASKATCHEWAN

ALBERTA

BRITISHCOLUMBIA

NORTHWESTTERRITORYYUKON

TERRITORY

NUNAVUT

NOVA SCOTIA

NEWFOUNDLAND & LABRADOR

Nanaimo

Vancouver

FortMcMurray

Edmonton

Calgary SaskatoonWinnipeg

Regina

Kelowna

SurreyVictoria

OttawaMontréal

Burlington

Halifax

CANADA

UNITEDSTATES

UNITED STATES

(10%)

(5%)

0%

5%

10%

15%

20%

25%

-1000

-500

0

500

1000

1500

2000

2500

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

Squa

re F

eet (

thou

sand

s)

Net New Supply Absorption Vacancy rate

Source : Colliers International, March 2012

DowntownTHE MARKETDowntown 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 continu-ing to tighten, whereas downtown of-fice 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 sig-nificant transactions took place during the quarter, such as SNC Lavalin’s rental of 40,000 square feet at 2015 Peel. In addition, the People’s Republic of China is set to establish its Consulate General in Montréal 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.

TRENDSMany 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 René-Lévesque West where CGI made more than 100,000 square feet available for sublease as part of its right-sizing ac-tivities. 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 nec-essary to put up new towers to accom-modate 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 con-struction (Viger Tower and Îlot 10 in Griffin-town) 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 building—which posted an availability rate exceeding 15% in the fall of 2011—is now almost full, with only 3.5% of its area on the market follow-ing 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.

INVESTMENTAs usual, liquidities are abundant and capi-talization rates are stable and encourag-ing, 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 René-Lévesque West was purchased by Groupe Alfid/Cromwell Man-agement 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.

FORECASTAlthough Montréal is experiencing a con-struction boom, with two mega-hospitals underway and two other hospitals being expanded, along with a multitude of con-dominium projects, the situation is totally different for office towers. The downtown vacancy rate has reached 5.4% and avail-ability 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 Montréal skyline is bound to change in the next few

NEW INVENTORY, ABSORPTION AND VACANCY RATES

P. 2 | COLLIERS INTERNATIONAL

MARKET REPORT | SPRING 2012 | OFFICE | MONTRÉAL

0%

2%

4%

6%

8%

10%

12%

14%Sublease Vacancy Rate Total Sublease Availability Rate Direct Vacancy Rate Total Direct Availability Rate

Source : Colliers International, March 2012

years. Two buildings under construction will include a proportion of offices, but they are mixed-use projects that also in-clude residential condominiums. This con-cept, which is widely seen in Europe and emerging in the United States, has yet to gain acceptance among companies seek-ing office space in Montréal. The Kevric project, the Viger Tower, should find an occupant to justify its existence, and Can-derel 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 spac-es are freed up unexpectedly.

SuburbsTHE MARKETSuburban Montréal posted positive absorp-tion exceeding 180,000 square feet at the end of the first quarter of 2012. All sub-urbs, 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 GMA’s most dy-

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 vacan-cy 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 unquestion-able appeal. Television station TVA just leased two floors (30,000 square feet) of 1010 de Sérigny 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%.

TRENDSAlthough growth is the name of the game in the downtown core, companies with of-fices in the suburbs are in consolidation mode. For example, pharmaceutical com-pany GlaxoSmithKline is in the process of consolidating its space and had a building put up in Laval. Suburban Montréal 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 build-ing 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 consis-tency among the submarkets, average net rent for Class A spaces is $13.29, post-ing 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 build-ings. This year’s new inventory just might reshuffle the deck. Two office towers were built on the South Shore in 2010-2011, and another is due to be completed this year. Quartier Dix-30’s 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 project—this one 27,000 square feet—is under construction in Boucherville, but no tenants have yet been found for the three storeys. Laval is also a vibrant mar-ket, 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

COLLIERS INTERNATIONAL | P. 3

MARKET REPORT | SPRING 2012 | OFFICE | MONTRÉAL

www.colliers.com/montreal

INVESTMENTSimilar to the downtown market, quality in-vestment products are rare in the sub-urbs. Well placed buyers are vigilant, always on the lookout for acquisition op-portunities. 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 opportu-nities, 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 opportuni-ties 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.

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

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 Cen-tres 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 proper-ties are unsuitable for the needs of mod-ern industry but may present an attrac-tive alternative for the knowledge-based industries.

GlossaryThe 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.

CONTACT INFORMATION

Andrew Maravita Managing Director Montréal Region +1 514 764 8180 andrew.maravita@colliers.com

512 offices in 62 countries• $1.8 billion USD in annual revenue

• 12,300 professionals

• 1.25 billion square feet under management

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 (Québec) Inc.

MARKET REPORT | SPRING 2012 | OFFICE | MONTRÉAL