When Imperial Tobacco Canada Ltd. decided to sell its Montreal headquarters, pessimists may have wondered who would want to invest in an older building outside the downtown business district.
But after years of being overlooked in favour of Toronto and Vancouver, investors are rediscovering Montreal, once the centre of Canada's financial industry. The city's burgeoning technology sector, along with established aerospace and pharmaceutical industries, have helped to push down office vacancies and send rents higher for the first time in years.
Despite stubborn unemployment (8.2 per cent in January, compared with 7.8 per cent nationally), and rental rates that are as much as $10 a square foot less than Toronto and Vancouver, Montreal's real estate market is on the verge of expansion. For the first time since 1992, private developers are staking claim to sites and aggressively seeking the anchor tenants they need to build new office towers.
CB Richard Ellis is to announce Wednesday that the Imperial Tobacco building has been sold to real estate investor Groupe Mach Inc. for $24-million, in a sale-leaseback deal that will see the tobacco giant remain as the primary tenant of the building.
"Perhaps the most noteworthy aspect of the transaction was the depth of interest shown by local and non-local institutional investors for a non-core, value-add investment opportunity at low initial yields," said CBRE executive vice-president Brett Miller.
There were 979 commercial real estate deals in Montreal in 2010, CBRE said, worth $2.9-billion. That was a 52-per-cent increase over 2009, and tied the city for second place, by dollar volume, with Vancouver, despite having several hundred fewer deals.
The interest is stoked by renewed life in the leasing market. In the fourth quarter, more than 224,000 square feet in Montreal were absorbed by tenants after a year of increasing vacancies. Cushman Wakefield estimates overall vacancy rates at 9.2 per cent, but said almost 500,000 square feet of space is likely to be leased in 2011.
The national average vacancy rate was 8.6 per cent at the end of the year, according to Avison Young.
Montreal's skyline could also see new towers within the next several years: Six office towers have been approved by the city and are ready to start construction, but none will break ground until an anchor tenant signs a lease. The developers are keen to draw new tenants to Montreal.
The most recent project came last week when the real estate arm of the Caisse de dépôt et placement du Québec said it would partner with a private developer to build a 477,000-sq.-ft. office tower in the downtown core.
Established companies may also decide to build new sites as they expand, or look to renovate existing facilities. Rio Tinto Alcan, for example, said last week that it is exploring partnering with a builder rather than spending up to $50-million to expand its existing downtown campus.
"You are finally starting to see rents go up, and the pricing on new construction is beginning to look justifiable," said Louis Burgos, senior managing director at Cushman Wakefield.
Avison Young's Quebec chairman Stephen Leopold said the city is on the cusp of reinventing itself as a major producer of green energy, and its "undervalued" properties are key to its future.
"There is a real sense of optimism that is starting to bubble beneath the surface of the new Montreal," he said. "The new Montreal is an awakening lion. We are the second largest city in Canada and have the western world's most unlimited supply of renewable energy. You don't need a PhD to figure out what this will mean to Montreal's new economy and its real estate prospects."