MONTREAL—For the past few years, economic activity has shown moderate growth in the Greater Montreal Area, but the real estate market set a new record in 2014, exceeding the previous record set in 2008, with an overall transaction volume greater than $4 billion.

From a growth perspective, 2015 shows promise as U.S. economic conditions keep improving, boosting export activity and keeping prices in Canadian dollars attractive to American investors, but challenges remain. Previously announced major infrastructure investments will improve Montreal's economy.
These observations are from Avison Young's Annual Review and Forecast for major cities in markets in does business in. The Canadian firm released the report last week, including a specific report on the Montreal market, for all sectors. Highlights are below:

Office

Vacancy rates rose to 11.5% from 9.7% during 2014, largely due to the addition of nearly 1 msf of new inventory, the conversion of former industrial buildings to loft-style office space and the rationalization of occupied premises by tenants at lease-renewal time.

Given the drastic increase in available area in 2014 (in addition to the 1.4 msf of office space currently under construction in 13 buildings and the projects still to come in the GMA), vacancy is expected to rise to 12% in 2015, A-Y says.

Retail

Retail sales ticked up slightly in 2014. The popularity of small neighbourhood and community centres is constantly decreasing as they face fierce competition from regional centres, power centres and lifestyle centres featuring American big-box retailers and outlet stores. The impact of such competition results in a rationalization of occupied space and a decrease in rental rates for local retailers. Premium Outlets is the latest retail project to open in the suburbs north of Montreal. Located in Mirabel, the 350,000-sf power centre includes 80 stores.

Industrial

The aging industrial inventory on the Island of Montreal has been undergoing an important transformation recently. Nearly 2 msf was converted to office space, condominium units or retail premises. Nonetheless, 1.2 msf of industrial space is currently under construction in the GMA. However, the vacancy rate remains at 6%. Improving economic conditions and the re-industrialization of the U.S. could have a beneficial impact on the Montreal market in the next few years. Industrial vacancy is expected to remain stable in 2015, according to A-Y.

Investment

In 2014, investment volume reached its highest point since 2008, at more than $4 billion. The most significant transaction was Cominar REIT's $1.6 billion purchase of 11 shopping centres, three office buildings and one industrial property (mainly in Quebec) from Ivanhoé Cambridge.

Other significant transactions included the purchase of a 50% interest in Quartier Dix30 in Brossard (valued at $400 million) by Oxford Properties, and the sale of the 840,000-sf Bell Campus on Nuns' Island by KanAm Grund to a Korean fund for $300 million. The Liberty portfolio in Ville Saint-Laurent, totalling 1.7 msf, sold to a group of investors led by Canderel for $280 million, and Ivanhoé Cambridge sold its 50% interest in the Sun Life Building for $138 million. Griffintown's main promoter, Devimco, also sold two mixed-use properties totalling 315,000 square feet to First Capital Realty for $102.2 million.

After a record year in investment volume, market performance is expected to be more modest in 2015. Nevertheless, Montreal's diversified economic sectors keep providing real estate investors with great opportunities.