Pulled from another thread:
Montreal: An Accomodating City for Canada's Biotech
Industry.
J. Louis Burgos, Senior VP & RM, Royal LePage Commercial Inc., Montreal QC.
(Originally published in Pharma, BioPharma & Nutraceuticals Canada, 1999)
In 1997, Canada's 9.8 million baby-boomers began turning 50 years of age. Although members of
the "me-generation" might not wish to celebrate the occasion, demographers like David Foot, the
best-selling author of Boom, Bust and Echo, predict the birthday milestone is destined to have a
profound effect on our nation's economy and, by extension, on Canada's commercial real estate
market.
A "virtual" tour of our nation's major urban centres, shows the unmistakable footprint of a new
breed of bio-medical, bio-agrifood and bio-environment firms which, with help of technology
advances, are pursuing initiatives that have the potential to provide Canada's graying population,
and their families, with aging-related health products, a bio-engineered food supply, a healthier
environment and a more sustainable means of harvesting the world's natural resources.
Though many provinces have been successful in attracting this new breed of bio-related firms,
Quebec, in little more than a decade has emerged as one of North America's preferred locations.
According to industry statistics, for example, more than 40% of Canada's biotech and
pharmaceutical industries are located in Quebec. The province ranks first in Canada in terms of
income generated from its bio-medical, bio-agrifood and bio-environmental sectors and is
considered by industry analysts to be among North America's 10 most influential biotech
environments.
Despite some obvious growing pains, KPMG reports that Quebec's biotech community is poised
for greater expansion, largely because of its efforts to create "the most attractive provincial
economic development program in the country." This mandate was communicated strongly to
American business leaders when Quebec premier, Lucien Bouchard, headed a trade mission to
the U.S. northeastern states in May, 1998. At that time, he guaranteed that investors of new major
investment projects would not see their tax burden grow for a full 10 years. As well, he said, the
fiscal advantages associated with expenses in research and development could be 100% greater in
Quebec than in competing locations such as Ontario, New Brunswick, Massachusetts, Michigan,
New York or Pennsylvania.
Not surprisingly, such incentives have not gone unnoticed by members of the biotech community in
Europe and the Pacific Rim. For them, however, Quebec's role as a pivotal partner in the North
American Free Trade Agreement holds added allure. It means they can benefit from Quebec's
favourable tax climate while simultaneously gaining access to lucrative U.S. and Mexican markets.
No where is evidence of this investment in the future more pronounced than in Montreal, where
more than two-thirds of the province's bio-related firms are located.
While most of these firms are small, measuring no more than 50 employees, all have access to one
of the most advanced research infrastructures in North America. One of the leaders of this
tightly-knit biotech community is the Biotechnology Research Institute (BRI), a National Research
Council of Canada initiative employing one of the largest bio-scientific workforces in the world. Its
presence is one of the reasons that Montreal has attracted the sixth highest concentration of bio
and pharmaceutical jobs in North America.
To complement these advantages, Montreal offers tenants, property owners and investors one of
Canada's most favourable environs with respect to real estate investment opportunities and
occupancy costs.
Evidence of this is cost advantage is well documented by a number of authorities. In 1997, for
instance, when KPMG looked at 42 of the world's leading industrial regions, they ranked
Montreal eighth in terms of offering the most advantageous start-up and operating costs. Royal
LePage's latest survey of Canada's key office markets confirms that taxes, operating costs and net
effective rents in the Greater Montreal Area remain 20% to 30% lower than in Toronto or
Vancouver. A comparable study by Royal LePage of Canada's national industrial market indicates
the industrial taxes and operating costs in the Greater Montreal Area are among the lowest in
eastern Canada. Net industrial rental rates compare favourably with Toronto and high-end R&D
space is extremely competitive when compared with space in Vancouver and Calgary.
Additionally, since Montreal has been one of the last markets to participate in North America's
real estate recovery, it continues to offer potential buyers some of the best-priced assets on the
continent, along with the greatest upside potential. While Greater Montreal has one of the highest
concentrations of business accommodation in Canada, offering users more than 79 million sq. ft. of
office space and in excess of 253 million sq. ft. of industrial space, it should be remembered that
the Region, like most of North America's leading edge biotech centers, has a critical shortage of
built-out space suitable for immediate occupancy.
Across Greater Montreal, for example, vacancy rates are projected to fall to approximately 13%
by year-end 1999, down almost a percentage point from 1998. Available accommodation in
Montreal Central's Class A buildings will be even more scarce, with vacancies hovering around
8%, lower in Class AAA space built in the last decade. To add to the dilemma, expansion-minded
users will continue to be confronted with a lack of large contiguous floorplates. Another year of
top heavy demand for Class A space in 1999 also means that office tenants can expect further
price segmentation between the City's various building classifications.
In Montreal's industrial sector, where absorption in 1998 outpaced new supply by a ratio of more
than two to one, market conditions are even tighter. The projected year-end 1998 vacancy rate of
7% is anticipated to fall lower in 1999 thanks, in part, to strong demand for high-endspace by
many industries, including pharmaceuticals.
The move toward more balanced office and industrial markets in 1999 implies that expansion and
relocation by the biotech community will occur within a sales and leasing environment that offers
less negotiating room for tenants and purchasers. This will be particularly true for start-up ventures
with limited access to capital. First-generation firms may discover their accommodation options
are best met through leased "incubator space" in Laval Technopole, an R&D industrial park
owned by the City of Laval, or in facilities operated by BNR or the University of Montreal.
Occupancy costs within this kind of space is anticipated to range between $30 - $50 per sq. ft.,
according to unit size and configuration, but offers tenants suitable accommodation with some
degree of lease flexibility. This is an important issue given that many first-generation bio-related
companies have shown the capacity to triple or quadruple their space requirements within the span
of the lease.
For more mature members of the biotech community, especially those with
an established line of financing, accommodation options should prove more plentiful. Statistically,
there is a very good chance that the bulk of biotech growth will occur in Montreal's western
suburbs, specifically in R&D business parks such as the Laval Technopole, St-Laurent's Citec
Technoparc and Kirkland's Industrial Park, where biotech firms are being aggressively pursued. In
1999, competitive leasing and build-to-suit development options in the centrally-located Montreal
Technoparc, fronting on the St. Lawrence River, will provide additional fodder for thought among
members of the biotech industry who wish to locate downtown. As a general rule of thumb, taxes
and operating expenses for downtown accommodation will higher than in the City's surrounding
suburbs. As in 1998, the specific accommodation needs of knowledge-based companies,
including those with lab-sensitive biotech environments, will be a driving force within Greater
Montreal's industrial build-to-suit market. In total, the Region's industrial inventory is forecast to
grow by about 2.4 million sq. ft. in 1999, similar to 1998's banner year. The recent resurgence in
industrial development activity could begin to impact the availability of prime land in high demand
areas early in 1999.
Those who chose to purchase an existing facility in 1998 will find that recessionary slump, will
remain below replacement cost. It should be pointed out, however, that retrofitting costs for
industrial buildings may be comparable to building a new facility.
When analysing retrofit opportunities, keep in mind that all properties are not created equal. To
determine a building's suitability for retrofit, biotech users should assess the structure carefully,
paying particular attention to its HVAC and electrical systems. This is especially important for
multi-storey structures where floor clearances and the building envelop may not be conducive to
the cost-effective installation of proper venting or technology infrastructure. In the industrial
market, self-contained, or stand alone, properties tend to offer the best potential for conversion.
Ceiling heights and dock loading facilities may also take on added importance where warehousing
and distribution activities are anticipated. Remember, too, that environmental considerations factor
heavily in the municipal approval process. With respect to emissions' controls, waste holding and
waste removal issues, it pays to look closely at regulatory precedents that may impact future use
criteria.
While the biotech industry is on the leading edge of an unparalleled growth curve, most companies
report that as much as 85% of future capital infusions will go toward research and development
initiatives. As such, it's critical that money spent on "bricks and mortar" should represent the best
value possible. A clear understanding of the factors affecting employee productively can often help
to identify the most efficient floorplate configurations for current, and future, space needs. Don't
dismiss this lightly. It's well documented that knowledgeable tenants can shave their space
requirements by as much as 3% - 4%, a saving that can then be reallocated to fund other
corporate priorities. As well, tenants should have a good understanding of the building's operating
environment, specifically the capacity and hours of operation for HVAC systems, security and
telecommunications. The efficiency of these systems may have a measurable effect on a tenant's
bottom line.
As for lease terms, it may prove wise to balance leasing flexibility against the peace of mind that
can accompany a decision to lock-in rates before market demand establishes higher benchmarks.
J. Louis Burgos
Senior Vice President & Regional Manager
Eastern Canada
Royal LePage Commercial Inc.
2001 University Street, Suite 1950
Montreal, Quebec H3A 2A6
514 841-3819; fax: 514 841-3860
lburgos@royallepage.com |
