How can real estate players create value in a competitive Montreal market?

Like other cities across the country, Montreal’s economy is on the mend, with the Conference Board of Canada predicting gross domestic product will grow 5% this year and 4.2% in 2022. But a competitive environment is creating rising business pressures in Montreal’s real estate market, requiring companies to explore creative solutions to optimize their portfolios.

Breaking ground in the housing market

On the residential side, the market for single-detached and semi-detached homes, townhouses and downtown condos continues to do well, helping spur construction in a city with limited supply of resale properties available. Builders are breaking ground, and the search is on for acquisitions.

Helping to accelerate development activity in the multifamily market in early 2021 was the pending introduction of the city’s 20-20-20 bylaw, which requires developers to allocate 20% of new builds to social, affordable and family housing. The bylaw took effect in April, which could affect future development activity amid other construction cost pressures and uncertainties for the industry.

 

Embracing opportunities in rentals and transit-oriented communities

Some developers have turned their attention to the rental market, with approximately 10,000 new units set for completion this year, according to the Canada Mortgage and Housing Corp.’s spring 2021 housing market outlook. Other key opportunities in the Montreal area include transit-oriented communities, especially given ongoing work on infrastructure projects like the Réseau express métropolitain light-rail network. This project will expand rapid transit across the Montreal region, with the first trains expected to start running on one branch of the network in 2022 before further sections go into service in 2023-24.

And even if the affordability issue isn’t as prominent in our province as elsewhere in the country, our interviews with Quebec real estate players for our Emerging Trends in Real Estate report also found rising interest in developing rental properties and affordable housing in the suburbs, in part due to government incentive programs. While interviewees across Canada cited the need for governments to increase collaboration with the industry to address the affordability issue, some Quebec players noted affordable housing is becoming an attractive opportunity in our province right now amid a more supportive environment than in some other areas of the country.

Transformation a trend for offices and retail

Significant transformation is taking place in the retail market. We’re seeing more non-traditional tenants take up space in shopping centres, along with pop-up retailers for seasonal goods—in addition to key anchor tenants like grocery stores and pharmacies. In the office market, tenants are generally looking to reconfigure their space rather than reduce it amid the ongoing shift to hybrid and more collaborative work environments. This is helping increase optimism even as CBRE found the downtown Class A vacancy rate rose to 9.2% in the second quarter of 2021 from 8.4% earlier in the year.

Several interviewees see the biotechnology and life sciences sector as a growing opportunity for the real estate industry in Montreal. The Government of Canada is continuing to work with the pharmaceutical industry to ensure supplies of products like vaccines, which is giving an added boost to this sector as companies specializing in biotechnology and life sciences seek more space for their businesses.

 

Navigating a tight market for industrial space

Of all of the asset classes, interviewees see the industrial market as having the most opportunity. Even as developers race to meet demand for industrial space, the availability rate dipped below 2% for the first time in Montreal’s history, according to Colliers’ industrial market report for the second quarter of 2021. Quebec’s low electricity costs are also helping to attract data centres to the province, including the Montreal area.

While rising rental rates are leading to increased interest in industrial properties, real estate players continue to struggle with limited land availability, leading some to look at vertical options as they explore different solutions in a tight market.

 

A rising focus on diversifying and optimizing portfolios

Overall, we found that while the Montreal area’s real estate market is generally strong, key shifts occurring in the industry and a competitive deal environment will require companies to scrutinize their investment decisions even more closely and look for opportunities to diversify and optimize their portfolios to increase returns. For some interviewees, this could mean finding ways to boost yields by exploring smaller or off-market transactions.

Looking at the retail sector, the focus on redevelopment will only increase amid rising pressures for this asset class and as owners of poorly performing properties look for ways to shore up their businesses. For some, a key opportunity is to redevelop those properties to incorporate warehousing, fulfillment and last-mile delivery uses. Others are accelerating efforts to embrace the rising trend of mixing retail and residential uses by building housing in place of parking lots. This offers the added advantage of creating more foot traffic for retailers.

The keys to creating value in a changing real estate market

The focus on creativity and finding ways to adapt to a changing real estate market will be critical as we found plenty of signs of additional pressures for the industry. Our report this year cited research from CIBC Mellon suggesting 42% of Canadian pension funds surveyed are planning to increase their investments in real estate over the next 12 to 24 months. Many of our Montreal interviewees noted the rising presence of institutional investors in the Quebec market, which is contributing to increased competition as these larger players look for ways to deploy their capital. While this is helping to buoy our market as a whole, it will be important for Montreal real estate players to explore new opportunities to create value as they look ahead to 2022.

Follow PwC Canada