Greater Montreal Area

June 3, 2020 | Canada

As this unprecedented situation continues to rapidly evolve, Avison Young’s briefing notes are intended to provide an up-to-date assessment of the impact on the commercial real estate market.

Period covered: May 16th to 29th, 2020

General trends, news and market observations

  • Businesses with street access in the Greater Montreal Area (GMA) started reopening to the public on May 25th, although alarming spikes in community transmission of the virus in some areas of Montreal (namely Montreal-Nord and Rivière-des-Prairies) were expected to delay the reopening date
  • On May 20th, the Quebec government announced a plan to gradually reopen service businesses offering dental, therapeutic, or personal services on July 1st. However, municipalities including Montreal and Joliette are asking for additional delays for the reopening of personal services. Quebec also announced the gradual reopening of recreational businesses and activities such as golfing, kayaking and fishing as of May 20th
  • The cultural industry is set to resume activities gradually as of May 29th, as museums, libraries and drive-in movie theatres will be able to reopen while complying with new safety measures. There are still no announcements for movie theatres and entertainment venues
  • Business owners in re-opened areas outside of Montreal are happy with the re-opening of activities, although many are concerned about issues including supply of hygienic items and PPE such as masks, gloves and disinfectants
  • On May 15th, Montreal Mayor Valérie Plante announced the conversion of more than 327 kilometres of streets into active safe routes. Starting in June, parts of Mont-Royal Avenue as well as De La Commune and Wellington streets will be reserved for cyclists and pedestrians. Many other streets will be reorganized in order to allow more space for social distancing. Retailers with street access will be allowed to open up shop on these arteries in order to facilitate business
  • Economists believe the worst is behind us as the overall Canadian GDP is expected to drop by another 9% for the month of April. The timing of the phased re-opening is expected translate into the GDP picking up steam in the report for the month of May
  • Mayor Valérie Plante announced the creation of an advisory committee, composed of a dozen of prolific Montreal business minds, to devise an action plan for the economic relaunch of the City of Montreal
  • Political and research organizations are proposing more and more solutions to relaunch the Quebec economy. A new IRIS (Institut de recherche et d’informations socioéconomiques) study suggests nationalizing Quebec banking institutions by dividing them into public establishments to relaunch the economy, while Quebec Solidaire proposes a temporary tax increase on profitable businesses until 2021 (11.6% to 17.4%) which could make $6 billion available for redistribution

Considerations for Construction and Permits (APCHQ)

  • The Quebec government announced additional funding totalling $2.9 billion for the PQI (Plan Québécois des Infrastructures) in order to help relaunch the construction industry
  • Minister of Transport François Bonnardel wishes to further fuel the economic recovery of the construction industry while taking advantage of lighter vehicular traffic to advance projects all over the province in a $3.2-billion plan. In addition to construction work on the Louis-Hippolyte-La Fontaine tunnel, the Mercier Bridge and major work on Highway 19, 2,000 worksites were deployed across the province starting May 18th. However, repair work in the Louis-Hippolyte-La Fontaine tunnel is expected to be delayed because negotiations are still underway between the Ministry and the only bidding group, Relais-Saint-Laurent
  • Montreal and Laval will be reorganizing portions of their highways to facilitate public transportation for workers affected by the closures and the many constructions sites for Réseau Express Métropolitain. Portions of Highways 15, 13 and 640 will be temporarily reorganized to improve public transit
  • Developer Carbonleo announced that mixed-use megaproject Royalmount will be postponed for a period of six months in order to modify the plans while figuring out how the pandemic will re-shape future developments and how they can adapt to this new reality. While the developer is asking for government assistance to complete its mixed-use complex, organizations and elected officials are urging Quebec not to invest money in this project, which they deem outdated in many ways

Office market observations

  • Le marché des bureaux évoluera très probablement en faveur des locataires à l'avenir, car les stratégies de travail à domicile se sont avérées efficaces pour de nombreuses entreprises jusqu'à présent, ce qui pourrait les encourager à réduire considérablement leur espace de bureau. Alors que certaines entreprises n'ont pas d'autre choix que de travailler à partir de leurs bureaux conventionnels, la plupart des entreprises de Montréal devraient avoir peu de mal à s'adapter à la numérisation de l'économie et à adopter des politiques de travail à domicile qui dépeupleraient considérablement leurs bureaux. En renforçant le virage en faveur des locataires du centre-ville de Montréal, il y aura probablement une augmentation de l'intérêt pour les espaces de bureaux à la périphérie du centre-ville afin d'éviter les zones surpeuplées et les infrastructures de transport en commun à court et à moyen terme, renforçant l'intérêt pour des sous-marchés comme la Rive-Sud ou Laval. Cette tendance mettra l'accent sur l'impact des travaux de construction du REM puisque Laval et l'Ouest-de-l'Île ont bénéficié d'une absorption supplémentaire en 2019 Bien que certains experts ne s'attendent pas à ce que le marché des bureaux tombe en panne, la plupart conviennent que les locataires de bureaux prendront plus de temps que jamais avant de s'engager, ce qui ralentit la vitesse des transactions alors qu'ils réévaluent chaque situation possible et terminent les opérations de diligence raisonnable avant de déménager dans de nouveaux locaux ou de négocier longtemps -baux à long terme Néanmoins, certains architectes et utilisateurs de bureaux ne pensent pas que la pandémie entraînera la fin des bureaux à aire ouverte. Ils croient qu'une réorganisation temporaire des bureaux sera nécessaire jusqu'à ce qu'un vaccin soit disponible, alors qu'aucun projet de réorganisation majeur ne devrait être entrepris, en particulier compte tenu du fardeau financier que de tels projets peuvent représenter en période d'incertitude. Alors que la plupart des immeubles de bureaux du centre-ville de Montréal sont désertés pendant la pandémie (entre 90% et 98%), de nombreuses entreprises comme KPMG, Sunlife, Shopify et CIBC choisissent de ne pas renvoyer leurs employés au travail avant 2021. Le télétravail jouera un un grand rôle pour ces organisations à l'avenir car seule une fraction de la main-d'œuvre sera attendue physiquement dans l'espace de bureau chaque jour

Industrial market observations

  • The pandemic has strengthened the interdependency between retail and industrial commercial real estate as e-commerce has exploded while retailers and businesses set up or improved their omnichannel strategies and online capabilities
  • Therefore, an increasing percentage of retailers will need to turn to industrial facilities in order to improve warehousing, distribution and supply management in order to meet the growing demand from e-commerce
  • This will probably contribute to tightening the already historically low industrial availability rate in the GMA as the Montreal industrial inventory lacks quality product and most industrial users turn to new, built-to-suit construction better suited to their needs
  • In the midst of the pandemic, Amazon has been very active in the Quebec market. The company signed a seven-year lease for a 240,000-sf industrial building in Laval. Amazon said it plans to invest up to $1 billion in Quebec during the next few years, while significant improvements will be made by the owner of the facility to increase the building’s shipping capacity
  • An article in La Presse also revealed that Amazon has issued an offer to purchase another industrial facility totalling 120,000 sf in Parc industriel Centre in Laval. The property sits on 478,000 sf of land, available for expansion

Retail market observations

  • Loopholes in the government relief programs are being criticized by some real estate owners as the eligibility criteria are deemed too severe, especially for tenants whose businesses are now able to re-open. Retail property owner Karine Simard of Immeubles Simard thinks the government commercial rent relief program is too harsh on small businesses. Most of her tenants paid only 25% of their rent as they hoped to receive government assistance, but the re-opening of businesses also suggests that they will not reach the 70% revenue loss threshold needed to receive help, which penalizes the landlord
  • As businesses with street access in the Greater Montreal Area started reopening to the public on May 25th, Montrealers were eager to get back to their “regular” shopping habits, as long lineups were observed all over the city
  • Phase 5 of Quebec’s re-opening plan will begin on June 1st as retail centres outside of Montreal will be able to resume business, as well as dental and physical care services. With commercial centres and malls set to reopen, landlords are confident in their ability to keep customers safe
  • Cominar REIT believes that one of the biggest challenges for its many retail centres moving forward will be for its employees and customers to feel safe and comfortable. The company plans to achieve such results by, of course, following social distancing and hygiene guidelines, but also by investing in training for its personnel
  • In Quartier DIX30, in Brossard, Oxford Properties announced the re-opening of more than 90 stores on May 25th. Oxford believes the re-opening should run smoothly because of the measures the company has taken to maintain social distancing and hygiene practices. Among those methods, streets have been turned into one-ways, store-front parking spots have been removed and hundreds of hand-sanitizing stations have been set up
  • The City of Montreal announced it will dispatch about 60 inspectors through all boroughs to supervise the reopening of retail stores, making sure safety and distancing measures are respected
  • Mayor Plante announces plan that the city will allow businesses to use public spaces for the summer with close to no occupancy costs. In other words, street-front businesses will be able to set up terraces and the front of their stores to sell products, without having to purchase a license at full price ($50 instead of $3,000). At the same time, as streets like Sainte-Catherine are expected to be closed to vehicular circulation all summer (at least), street-side restaurants are asking for a rule change regarding consumption of alcoholic beverages (which is only permitted with the consumption of food). This would allow them to benefit from a better usage of their terraces and help them survive in the long run
  • In the meantime, Montreal restaurants are finding new ways to survive, such as developing partnerships with local grocery stores to sell ready-to-eat meals while dining rooms remain closed, and there are still no indications or announcement regarding the progressive re-opening of restaurants and bars
  • Customers are worried about the lack of parking spaces resulting from the many street closures, but the City of Montreal believes that work-from-home strategies in place counterbalance parking requirements

Multi-Residential market observations

  • According to CORPIQ (Corporation proriétaires immobiliers du Québec), only 15% of May rents are left unpaid – encouraging news as it represents a 4% decrease from last month
  • OCPM (Office de consultation publique de Montreal) announced modifications to the 20-20-20 bylaw that would only apply restrictions for developers with respect to the social housing aspect of the projects, while delaying its affordable and family housing restrictions. The reasoning behind the rule change is to prevent developers moving their projects outside the city of Montreal
  • The pandemic caused construction delays that are jeopardizing the delivery of thousands of new homes, while stressful financial times where tenants are spending 30%+ of their income on rent – potential ingredients for a housing crisis
  • Quebec housing leaders (ACQ, APCHQ, IDU and CEGQ) are joining forces to request funding for families in need. Based on funding other provinces received, Quebec is expected to receive $1.5 billion to be used on PAL (Programme québécois d’allocation logement) and the construction of 4,500 affordable housing units
  • Montrealers cramped in downtown condos and apartment buildings and working from home during the pandemic are realizing they will need more space moving forward. With the closure of public spaces and common areas inside apartment complexes and condo developments, some tenants feel the need to move to bigger units, so there could be an increase in demand for larger units in the short- to mid-term
  • FRAPRU (Front d’action populaire en réamenagement urbain) predicts a major housing crisis when the state of emergency is lifted as owners will have the opportunity to evict tenants in default. The organization also estimates that the city will need more than 10,000 units of social housing this year alone
  • SCHL predicts home prices could fall 9% to 18% in the coming year, while Canadian banks are more optimistic with a 5% to 10% estimate

Investment market observations

  • BTB REIT announced that it was able to maintain 84% of revenue streams thus far but will reduce distributions payable to shareholders by 28.6% as of June 15th in order to help with cash flow and support operations
  • A unanimous consensus of panelists during a Real Estate Forum webinar revealed that real estate investment trusts are continuing to work on the development of their portfolios while pursuing acquisitions in the multi-residential sector
  • The largest real estate investors are expected to hunt for deals while few buyers are active, and several deals are falling through the cracks. Those factors are likely to make prices fall when the market returns to normal
  • Some investment experts, such as Michael D. Underhill, Founder and Chief Investment Officer at Capital Innovations, believe it’s time to be aggressive as many real estate investors are ready to co-invest in distressed assets and loan opportunities. As a result, many new real estate funds are being created to take advantage of the loss in value of distressed assets
  • Due diligence periods for investors are expected to be extended as travel and property tours are restricted

For more information please contact:

David Major-Lapierre +1 514.905.5443 david.major@avisonyoung.com

For more on the virus’ potential #CRE impacts, read the latest briefings on our Avison Young Resource Centre:

The spread of COVID-19 and the containment policies being introduced are changing rapidly. While information in the briefing notes is current as of the date written, the views expressed herein are subject to change and may not reflect the latest opinion of Avison Young. Like all of you, Avison Young relies on government and related sources for information on the COVID-19 outbreak. We have provided links to some of these sources, which provide regularly updated information on the COVID-19 outbreak. The content provided herein is not intended as investment, tax, financial or legal advice and should not be relied on as such.