There’s reason for long-term optimism with Montreal’s commercial real estate market but let’s hold off on the celebrations
While it is important in the real estate business to always look forward and embrace optimism — the value of real estate over time goes in only one direction, after all — it is my goal to also add a dose of realism to often theoretical discussions about the market in Montreal.
This is why we want to #BuildUpMTL; in order to convey the message that our governments, particularly at the municipal level, must respond to consumer demand and not shy away from ambitious development plans. It’s important to know what’s happening in the market, on the ground, to make the appropriate decisions.
Champagne on Ice, for now
In November, a Globe and Mail article (“Montreal’s office market rebounds to prepandemic levels”) suggested that offices were back with a vengeance. It cited impressive statistics, like a third quarter estimated bump of $615M in real estate transactions, which the newspaper interpreted as a sign of strong investor confidence. Good news is in short supply these days and this should be cause for celebration — right?
Let’s not pop the cork on that champagne just yet, because the numbers don’t quite add up to a full rebound.
“Investor demand for Montreal office towers has rebounded to levels that prevailed before the COVID-19 pandemic,” the piece begins, only to then assert that real estate investors are unconcerned by high vacancy rates. That is actually a serious concern for many investors!
The hard truth is that what appears to be an upswing is actually more of an optical illusion. Everyone wants a return to “normal” but wearing blinders will not get us there any quicker.
We must consider which deals are being made, how we need to accommodate more of them, and how to address the real estate stock that cannot be modernized as quickly.
Big Deals Obscuring the Trends
The dollar value of recent commercial real estate reports look good but what they fail to communicate is how most of this action is attributed to major portfolio transactions. Big-time commercial players are buying up to dozens of buildings at a time, which gives a false sense of a generalized recovery in the market.
Let’s not get ahead of ourselves. We are seeing movement on the commercial side but we are not back to a pre-pandemic landscape, as you may have suspected merely by observation following your most recent visit to any Montreal office tower. We can look just at our own record $300M deal last year for an indication of how large transactions are driving a somewhat misleading narrative.
What we’re seeing on the ground most of the time are owners who do not want to sell because they still have a lot of ground to make up from the past two years.
As for these large-scale transactions, don’t be fooled — these are driven by long-term and large-scale investment strategies; that is to say, not the kind that translates into an immediate rebound for the downtown office market.”
Size Does Matter
One must consider scale and size when interpreting the data. True, commercial real estate transactions have more than quadrupled since the start of the pandemic in early 2020 but it’s like my finance teacher used to say, one plus one equals whatever you want. You can spin the data however you like, but when you really look at it, all that floor space being moved is actually just a handful of players with an unusual amount of buying power.
Small and medium-sized operations are still bearing the brunt of this downturn and remain the true barometer for market recovery. The numbers in support of a comeback tell one story but when you look at what’s happening with real people — that’s the real story.
There is the irrefutable math of cash flow. If renters are not able to keep up with their rent or are downsizing their offices to accommodate hybrid workforces, how are most commercial owners currently in a favourable position?
We must be honest about the unexpected challenges to come, even as our health crisis subsides. It takes an immense amount of money to maintain a multi-million dollar commercial property in a downtown core like Montreal’s, and it has to come from somewhere.
If many tenants continue to have trouble meeting their obligations, major decisions by commercial operators will have to be made in 2022. Let’s not be too quick to celebrate a rebound when there’s a ton of work to do and space to reorganize as we adapt to a new reality.
Before the rebound, we have to commit to reinvention by working together, governments, commercial tenants, landlords and developers, to better prepare the workplaces of the future. It starts by saying “yes” a lot more often.
#BuildUpMTL