Quebec’s Office and Industrial Real Estate Market: Q4 2024

In Q4 2024, Quebec’s commercial real estate landscape experienced a blend of recovery and evolving market dynamics. While the broader Canadian market began to stabilize, signalled by the first year of positive net absorption since 2019, Quebec’s office and industrial sectors faced unique challenges and opportunities. 

Montreal’s office market was characterized by high tenant selectivity and competitive pressures, while Quebec City benefited from a resurgence in investment activity and more favourable credit conditions, according to CBRE reports. These reports also indicate that industrial segments in both cities reflect broader trends of slowed pre-leasing in Montreal and stabilizing dynamics in Quebec City amid rising cap rates.

Office Market Dynamics in Quebec

Montreal’s Office Market

Montreal witnessed an uptick in office market activity during the fourth quarter. Tenants in the city have become increasingly selective, seeking buildings that specifically match their operational needs. This heightened tenant scrutiny contributed to varied performance across property classes. The overall vacancy rate in Montreal stood at 18.2%, reflecting a competitive landscape where limited inventory—such as grocery-anchored strip malls—has intensified the bidding environment. In addition, growing institutional interest and anticipated further interest rate cuts projected for early 2025 are driving cap rate compression, with owners adjusting yields to maintain attractiveness amid a tightening market. 

Quebec City’s Office Market

Quebec City, on the other hand, experienced a notable recovery in commercial real estate investment activity in 2024. This resurgence can be attributed to improved credit conditions and easier access to capital, creating a more favourable investment climate. Downtown properties, particularly Class A office spaces, have seen net rent levels stabilizing in the range of $7.00 to $8.00 per square foot quarter-over-quarter. As mid-sized investment deals regain momentum—a segment that was muted in 2023—the outlook for Quebec City appears optimistic. With borrowing costs set to fall and inflation tapering off, the city’s office market is positioned for further stabilization in the near term. 

Industrial Market Trends in Quebec

The industrial sector in Quebec continues to evolve amidst broader market shifts. 

Montreal’s Industrial Market

In Montreal, industrial developments in 2024 recorded a significant drop in pre-leasing activity—from 77.8% in 2022 to 42.6% this year. This notable decline indicates that tenants are taking a more measured approach when committing to new warehouse deals, largely due to the increasing array of available options. Consequently, this has contributed to an upward trend in the region’s availability rate, signalling a more tenant-friendly environment. 

Quebec City’s Industrial Market

Meanwhile, Quebec City’s industrial market has shown signs of stabilization despite rising cap rates during 2024. The gradual increase in cap rates suggests that investors are recalibrating their return expectations in response to market conditions. However, with rental rate growth and normalized availability figures, bolstered by the limited delivery of new industrial products, the sector is slowly balancing supply and demand. This stabilization underscores the resilience of Quebec City’s industrial market as it adapts to shifting investor and tenant priorities. 

The Broader Canadian Context

Within the broader Canadian context, the office sector’s first year of positive net absorption signals a slow recovery, even as elevated vacancy rates and constrained new construction persist. The industrial market’s increased availability, balanced by resilient net leasing in key regions, underscores the sector’s adaptability in a shifting economic landscape.

Canadian Office Trends

Across Canada, the office market is displaying early signs of recovery. Nationally, Q4 2024 saw a positive net absorption of 2.6 million square feet, marking the first year of positive performance in this segment since 2019. However, despite this progress, the overall office vacancy rate remains elevated at 18.7%, with expectations that it could peak in early 2025. A decline in sublet space over seven consecutive quarters and a slowdown in new office construction, now at a 20-year low with only 3.4 million square feet under construction, further highlight the challenges facing the sector. Limited new project commencements, totalling a mere 108,000 square feet in 2024, have underscored the cautious stance among developers. 

Canadian Industrial Trends

In contrast, the industrial market on a national scale continues to grapple with increased supply. The overall availability rate rose to 4.8% in Q4 2024—the highest in nearly eight years—as new product deliveries expanded, even as select markets like Alberta drove positive net leasing activity. With cumulative industrial net absorption for the year reaching 1.4 million square feet, the sector demonstrates resilience despite these challenges. 

Investment Trends and Key Influences

Investment trends in both the office and industrial sectors reflect a nuanced market response. National office cap rates registered the largest annual increases among asset classes in 2024, driven by yield adjustments in both downtown and suburban segments. Meanwhile, industrial cap rates largely held steady, with only modest movements observed in markets such as Edmonton and Quebec City. Overall, while the national average cap rate for all properties experienced a slight decrease, localized market conditions continue to drive asset-specific variations. 

Several factors have significantly influenced these trends. The Bank of Canada’s fifth consecutive interest rate cut, lowering the overnight rate to 3.25%, a 1.75% reduction since early 2024, has played a pivotal role. This monetary easing, combined with broader economic uncertainties such as potential U.S. tariffs, political instability, and policy shifts related to immigration, has fostered a complex investment environment. Additionally, changes in CMHC policy have reshaped the lending landscape, favouring multifamily debt over conventional construction loans and thereby influencing capital flows across the commercial real estate spectrum. 

Joanna Gerber