The Montreal office market has been experiencing dynamic shifts, with net asking average rent per square foot seeing a 2.8% year-over-year increase in Q2 2023. However, negative net absorption, particularly in the Midtown and Downtown markets, has raised questions about the future of these office spaces. This blog post delves into the factors affecting the market, especially in relation to the feasibility of converting office spaces into residential properties.
Negative Absorption and Market Trends:
The most recent quarter saw a negative 376,756 square feet of net absorption, reflecting the highest negative absorption since Q4 2021. Activity in the Midtown and Downtown markets, as well as the Class B and C segments, played a significant role in this negative trend. Interestingly, there’s been a clear preference for Class AAA office spaces in Downtown, aligning with the ongoing flight-to-quality trend. This preference has maintained Class AAA buildings at a 9.1% vacancy rate, while the Downtown vacancy rate increased to 14.8%. Notable performers include Place Ville Marie, Le 1000, and Le 1250 Rene-Levesque.
Suburban Momentum and Hybrid Model:
The suburban market has witnessed a drop in vacancy rates by 30 basis points to 15.9%, presenting a contrast to the Downtown and Midtown areas. Tenants are attracted to the suburban market due to its lower rental costs, ample parking spaces, and proximity to residential areas, which complements the hybrid work model. Developments like “Espace Montmorency” and “Solar Uniquarties” are offering quality products with amenities that rival Downtown offerings. This has led to a reduction in sublet availability in the suburbs, while sublets have surged in Midtown.
Sublease Impact and Conversion Potential:
Sublet activity has become a major factor in the market, with a 13.6% rise in supply to 3,156,802 square feet. Since the pandemic, sublets have seen a 215% increase in availability compared to direct leases, which experienced a 69% increase. As companies optimize their space needs, sublease spaces are expected to remain elevated throughout 2023. Tenants continue to find sublease options appealing due to reduced buildout costs, flexible lease terms, and no fixturing periods.
Residential Conversion Considerations:
Given the negative absorption and rising sublet availability, it’s worth considering whether the Montreal office market is primed for residential conversion. The shift in preference towards Class AAA spaces in Downtown and the appeal of suburban areas for residential-hybrid models provide opportunities. However, factors such as location, zoning regulations, infrastructure, and the potential costs of conversion must be carefully evaluated. Additionally, the success of previous office-to-residential conversions and the demand for residential properties in the area should guide decision-making.
The Montreal office market is undergoing significant changes, with negative absorption and a notable rise in sublets reshaping the landscape. While challenges exist, the current trends suggest potential for residential conversions, particularly in areas with strong demand for quality residential spaces. As the market evolves, careful consideration of factors related to conversion feasibility and market demand will play a crucial role in decision-making for real estate professionals.