On May 28, 2015, Newmark Knight Frank Devencore published its Real Estate Market Study for Spring/Summer 2015 and essentially noted that vacancy rates in downtown Montreal’s Class “A” and “B” office buildings continued to increase over the second half of 2014, establishing themselves at 8,6%, up from 8% at the beginning of 2014. Overall, Newmark Knight Frank Devencore has indicated that overall availability rates, which take into consideration the office space that may currently be occupied but is available for lease or sublet, have increased to 16%. 

Mr. Jean Laurin, president and CEO of Newmark Knight Frank Devencore, was quoted by the Montreal media advising that this figure is a decade-long record for the Montreal core and can essentially be explained by three main reasons:

  1. Increase in the total available inventory, as there has been a number of new office developments in Montreal lately – after a hiatus of more than 15 years – and these projects are now slowing coming onto the market;
  2. Ongoing redevelopment of industrial properties in the periphery, which have attracted a certain category of tenants away from the Montreal core; and
  3. New occupancy standards whereby when relocating to new office spaces, tenants will now be more conscious about using space efficiently, which translates directly into reducing overall needs for space.

How does this situation impact you?

– For tenants and subtenants:

Of course, this environment will likely have a major repercussion in the context of commercial leases and subleases negotiations, as tenants’ and subtenants’ leverage will be greater and will contribute to driving overall rental rates down as well as favouring more generous incentives on landlords’ part. Also, practically speaking, landlords may overall be more lenient when presented with requests for lease assignment or subleasing, as they will want to make sure to capture, or at least seriously consider, any existing market opportunities.

– For property owners:

On the flip side of the coin, will that situation contribute to an overall devaluation of commercial properties in downtown Montreal? It is certainly too early to tell, but let’s remember that the next assessment roll for purposes of municipal taxation in Montreal will enter in force on January 1st, 2017 (applicable for years 2017-2018-2019) and will be based on the conditions of the real estate market as of July 1st, 2015.

Typically, commercial office properties are assessed using the income approach. Of course, big variations in the actual income flow or difficult market conditions which translate into high vacancy rates may have a major impact in the overall assessment of a commercial property. In that context, property owners impacted by the current situation should be on the lookout and document as much as possible the difficulties they are experiencing right now, as this could prove to be valuable information if ever they wish to challenge the assessment of their respective properties when the new assessment roll will enter in force in 2017. In accordance with the Municipal Tax Act (Québec), a very short contestation window will then be opened for a period of 4 months, so the better the property owners are prepared, the faster they will be able to react.