Montreal's Office-Lease Market
Still Weak, Getting Firmer

Montreal's office-leasing market is getting healthier though it remains one of Canada's weakest.

"When you look at the pure numbers, we look like the poor cousins, but from where we came from it's been a good recovery," says Brett Miller, regional managing director for Eastern Canada with CB Richard Ellis in Montreal. The improvements are being driven in part by demand from the region's growing software-gaming industry and other types of service companies that are helping to chip away at a surplus of space added in the early 2000s, Mr. Miller says. He also says that call centers are attracted by Montreal's labor force that offers many workers fluent in both French and English.

Montreal's downtown office-vacancy rate fell to the 9% range in the second quarter, from a high of 14.9% in the first quarter of 2003, while suburban rates ticked down to 14.4% in the second quarter, according to CB Richard Ellis, a real-estate services firm. By contrast Calgary's second-quarter downtown office vacancy rate edged up to 2.4% and its suburban rate was 3.2%. Average net Class A downtown office rents in the second quarter were lower in Montreal than in many other major Canadian cities, according to CB Richard Ellis.

The weaker performance stems in part from Montreal's exposure to the troubled manufacturing sector while some other markets like Calgary have benefited from high energy prices. The Montreal area's gross domestic product rose by just 1.6% last year, well below the 6.9% seen in Calgary, according to the Conference Board of Canada, a nonprofit Ottawa-based research organization.

Montreal, known for its cosmopolitan restaurants, shopping and boutique hotels, anchors a larger region that is home to about 3.7 million residents and has been battered by manufacturing job losses in recent years. The region has been hurt both by lower-cost competition from abroad and a stronger Canadian dollar, which makes its products more expensive outside Canada, according Mario Lefebvre, a director at the Conference Board. Montreal's diverse economy, which includes a tourism industry that benefits from the city's European flair and a strong housing market, has helped offset the losses, says Mr. Lefebvre.

Several projects suggest rising confidence in the improving Montreal office market. SITQ, a real-estate investment and development firm based in Montreal, announced last fall that it and another real-estate firm plan on building a nearly 400,000-square-foot office building in downtown Montreal. Amelie Plante, a SITQ spokeswoman, says SITQ wants to prelease about 40% of the space before it starts construction. SITQ's primary shareholder is the Caisse de dépôt et placement du Québec, a Canadian fund manager.

Meanwhile, French-based videogame publisher Ubisoft Entertainment, expects to add about 1,000 new jobs in Montreal by 2013 and plans to invest in a new studio where it will produce short films inspired by games. Ubisoft opened operations in Montreal about 10 years ago, in part to take advantage of the region's strong video-game labor force.

One project could mean some short-term pain for downtown Montreal landlords. A 605,000-square-foot new headquarters complex for BCE Inc., the telecommunications company that is soon to be known as Bell Canada, is under construction on Nun's Island across the Saint Lawrence River from downtown Montreal. About 3,000 of the company's employees will move out of various buildings in downtown Montreal and into the complex starting in September of 2008, according to Eric Haggar, the company's lead manager for the Nun's Island project.

Many brokers expect the improving downtown office market to absorb BCE's vacated space downtown, but some question whether the BCE move could lead other companies to follow. J. Louis Burgos, senior managing director with the real-estate services firm of Cushman & Wakefield LePage in Montreal, says that the departure of the telecommunication company's headquarters is unusual for the Montreal market, where most larger corporations have traditionally located their headquarters downtown. "This is the first of the blue-chip, high-profile companies to leave downtown," says Mr. Burgos. "It will be interesting to see if any other large service companies do the same thing."

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