CLICK BELOW FOR THE LATEST ISSUES

CANADA’S INVESTMENT HEARTLAND

August 1, 2014

Québec City’s attraction as an investment opportunity is supported by more than two decades of robust economic growth, a well-planned infrastructure and solid real estate offering.

Strategically located just 100 kilometres from the U.S. border and within two hours’ flight-time of the major markets of New York and Toronto, Québec City is shooting up the rankings in terms of investor attraction and market competitiveness.

Boasting a historically resilient economy with more than 200 investment projects, valued at CAD$10.5 billion, either in the pipeline or currently underway, CAD$3.7 billion has been allocated for commercial projects and US$1.5 billion for industrial development.

Metropolitan Québec City attracts high-performing companies, confident investors, qualified workers and world-class researchers, and its infrastructure is growing through to 2020 with a raft of projects including wind farms, hospital complex and a new CAD$400 million multi-purpose arena taking shape.

The strength of the local construction industry is also reflected in the value of issued building permits, which has grown at an average annual rate of 8% over the past decade.

According to Avison Young’s 2014 Forecast for Commercial Real Estate, private sector diversification over the past 10 years has also seen the city focus on enhancing its position as a centre for innovation and research, resulting in the creation of many high-skilled jobs.

Denis Perreault, Managing Director for Avison Young’s Québec operations attributes the strength of the region’s commercial sector in recent years to the concentration of public services and the presence of financial firms and life insurance companies that have helped fuel the economy, and put the breaks on unemployment levels, which stand at below 5%.

In 2013, several major investment real estate transactions took place with the sale of two power centres – Méga Centre Lebourgneuf and RioCan Sainte- Foy – for CAD$238 million; the CAD$83.5 million sale of two multi-residential properties at Les Méandres and l’Aristocrate; and the Bois-Fontaine office complex, which achieved CAD$50 million.

According to Marie-France Benoit, Senior Director, Altus InSite, Québec City has seen a slowdown in the pace of construction in the first half of 2014, but demand remains positive – an indicator of market stabilisation.

INVESTOR PROFILE

Investment in commercial real estate from leading pension funds and life insurance companies is fuelling sector growth according to Benoit, who says: “Insurance companies are investing here because many have their head office in the city, and insurance and financial companies account for almost 10% of all jobs in the Québec City region.”

Benoit says that the current trend is weighted towards national institutional investors, as she explains: “They tend to acquire existing portfolios, while local investors are developing new projects. The current ‘hot’ opportunities for investment are concentrated on areas of the city that are underdeveloped and going through major revitalisation.”

Adds Avison Young’s Perreault:  “The investment market has remained active with two types of investors present – the large pension funds and institutional investors including Life Insurance Companies and REITs such as Cominar, as well as local private investors such as Groupe Germain, Groupe Dallaire, Société Immobilière Dupont and many others.”

ROOM TO GROW

Avison Young’s Québec City Office Market Report for Q2 2014 puts the office sub-market vacancy rate at 5%, down from 6.7% one year previously. During the same period, the downtown vacancy rate decreased slightly from 7.8% to 6.9% with midtown vacancy rates reaching 4.9% mid-year, down from 5.8% twelve months before.

Several projects have been delivered in the midtown area over the past year with more than 640,000 square feet of office space. Absorption has also increased significantly, with an annual average fluctuation of around 200,000 square feet.

“In the office sector, vacancy rates are historically high, but remain well below other Canadian market averages,” notes Benoit.

“In the first half of 2014 there has been a distinct slowdown in the release of buildings and commercial space,’ she adds.

According to Avison Young data, in recent years demand for larger office space has been driven by insurance companies, financial corporations and IT firms. With the recent delivery of one million square feet of office space, new building construction activity has decreased, with only 174,000 square feet of office space currently under construction, all in the Sainte-Foy area.

Two new buildings are currently under construction – the second tower of the Henri-IV Business Complex, totalling 94,000 square feet, with 55% pre-leased, and the 80,000-square foot Espace de Bourgogne Building, which is 80% pre-leased.

Despite new construction, gross rental rates have maintained over the past few years, hovering around the CAD$27.00 per square foot mark in the Downtown area. The average gross rent in surrounding areas has slightly decreased, down year-on-year to CAD$26.75 from CAD$27.30.

After experiencing strong growth, Avison Young reports that the office market has picked up pace in the last few years with increased midtown activity. However, a significant decrease in construction activity is forecast to kick in shortly, with stabilisation in vacancy rates but a slight rise in rental prices.

Says Perreault: “The last wave of construction put a lot of pressure on vacancy rates. A strong positive absorption rate helped decrease the vacancy rate from almost 7% in 2013 to approximately 5% in the first six months of 2014.

“There are still some new construction projects that could happen, located mostly along Laurier Boulevard and in Lebourgneuf. Those new projects will eventually put some downward pressure on rents.”

STAGNANT RETAIL

Growth in the retail market has been lacklustre in the last few years with the retail landscape shifting to a power centre-centric model.
In 2013, retail sector construction stalled with no new projects announced. The only noteworthy activity was the renovation of three former Zellers stores located in shopping centres now occupied by Target.

Consumers continue to be well served according to Avison Young, with more than 1,000 retail outlets spread across five regional shopping centres and four power centres. However, with increasing competition from U.S. big-box stores and e-commerce opportunities, they expect to see retailers attempt to reduce operating costs by decreasing square footage and rents.

Benoit confirms this trend, and says: “Retail sales also remain stable without any real growth.”

Looking ahead to 2015, she is cautious on the topic of retail sector growth although she discounts a continued flatlining. “What we see more is large supermall owners redeveloping and reinvesting in their flagship properties,” she notes.

Perreault highlights plans for new construction projects and development within existing properties such as the Galeries de la Capitale, plus an important new development – Carrefour St-Romuald – located on the south side of the city.

“This will see investment of more than CAD$400 million from several developers, with major tenants such as Costco, Toy ‘R’ Us, Club Piscine and Michaels already committed.”

LAND FOR DEVELOPMENT

The area’s industrial parks are also seeing active interest with parcels in most zones at 95% occupancy and limited opportunity. With a market characterised mostly by owner-occupier properties, with a limited number of leased industrial or storage facilities, demand is being stymied.

There are also very few buildings for sale in the market and, as a result, these factors are putting upward pressure on rental rates and asset pricing, which is now equivalent to the construction costs associated with a new building.

“In the last six years, land prices have more than doubled,” confirms Perreault.

Development is still possible though and Avison Young highlights the suburban industrial park in St Augustin de Desmaures, to the west of the city, which is expected to generate new construction in 2014 on available land.

With high demand but low availability for industrial space noted by various industry sources, the upwards pressure on rental rates is putting Québec City above other Canadian markets due to the shortage of leasing availabilities.

“It is a market dominated by owner-occupier and built-to-suit product. Building costs are increasing, and so are sale prices,” comments Benoit.

Real Time Web Analytics