Real Insights | Q1 2025: Navigating market dynamics in Québec

We’re excited to introduce a fresh way to engage with our insights! Reports now include a short 2-minute video offering a quick overview of the key takeaways. Each report focuses on the top three issues shaping the market: Economics, Investment Activity, and Key Trends, and in this quarterly report we turn the spotlight on Québec, including insights aligned to the Montréal Real Estate Forum and the Québec Apartment Investment Conference.

Prefer a deeper dive? Scroll down to read the full report below.

Q1 2025: Navigating market dynamics in Québec

Economics

Although our GDP growth suffered during the post-pandemic high-interest rate era, we narrowly avoided a recession. Once inflation reached the Bank of Canada’s 2% target, we saw a series of rapid interest rate cuts. But as the likelihood of substantial U.S. tariffs being imposed on Canadian exports looms, the chances of our dipping into a recession grow. While our exports to the U.S. were significantly lower a decade ago, they have been creeping up as trade relations with China sour and Russian sanctions were applied after its invasion of Ukraine.

Federal and provincial politicians are finally looking seriously at the need to reduce interprovincial barriers to trade. This won’t increase GDP as dramatically as finding new, non-American trading partners. Québec, primarily an aircraft, mineral and forestry products exporter, is one of the provinces that will suffer most from the imposition of significant U.S. tariffs. Unemployment is likely to rise to between 5.9% and 7.5% province-wide, while Québec’s real GDP is forecast to grow only 1.2% in both 2025 and 2026. Inflation is projected to hit 2.5% in 2025 before decreasing to 2.2% in 2026.

Since federal and provincial debt burdens have improved recently, both levels of government will be able to mitigate the negative effects of higher tariffs by offering stimulus packages to both industries and individuals. For individuals, these could include investing in reskilling programs to transition workers to industries less entwined with the U.S. economy. Of particular concern is the Québec aluminum industry, which is the second largest in the province. The U.S. imports two thirds of Québec ’s aluminum, and while increased tariff costs will be passed on to importers, that cuts both ways, as aluminum exported to the U.S. is shipped back to Canada as finished or semi-finished goods and would be subject to Canadian tariffs on their return if, as proposed, we retaliate in kind as part of the trade war. We use nearly a third of our aluminum (29%) in the automotive and transport industries, and a further 22% in construction.

As market conditions evolve, there will be more industrial rightsizing and restructurings as businesses focus on their core competencies. The closure of Dorel Industries’ Montréal furniture manufacturing facility is an example. With higher interest rates leading to less consumer spending on home furnishings, Dorel is streamlining its operations to improve its overall efficiency and remain profitable. The closure of Amazon’s seven warehouses in the Greater Montréal Area means the loss of 2,000 direct jobs and more than double that when subcontracted jobs are considered.

Investment Activity

The total number of 2024 Montréal multifamily transactions were up 47% year-over-year, although it was still 21% lower than in 2021. Nearly half of these sales occurred in Q2 2024, with mom-and-pop owners liquidating buildings with 10 units or less in response to changes in capital gains taxation.

As our dollar continues to weaken in comparison with that of the U.S., however, it could lead to increases in both exports and foreign direct investment. Private and foreign buyers continue to dominate investment, while institutional investors stay on the sidelines. However, institutional investors are starting to look carefully at mixed residential and retail sites. With Montréal’s economy beginning to slow, there is less demand for industrial warehouses, and therefore less investment in new supply.

With considerable continuing demand for purpose-built rentals, shortened developmental and construction approval times are key to ensuring the restart of projects that are once again feasible due to lower interest rates and higher rents. Last year’s most significant office transaction was Immo Alliances’ purchase of a Sainte-Catherine Street building as a student housing retrofit.

Key Trends

Recommended rent increases for 2025, as suggested by Québec’s Tribunal administratif du logement, have been set at 5.9%, an almost 25% increase over 2024’s recommendation. Actual average rents increased 7.3% last year. This will cause financial strain for many Québec households and further delay first home purchases while continuing to drive demand for purpose-built rental accommodation, as will the new cap of 4.5 times a borrower’s annual income on mortgage loans. And with many mortgages up for renewal at still-higher-than-pandemic interest rates, rental demand will continue to increase despite the federal government’s slashing immigration and foreign student targets.

Demand for multi-residential housing will continue to be high, although there will be more multifamily developments outside the Montréal CMA, in places like Saint-Hyacinthe, Trois-Rivières, and Québec. Asking rents in Montréal declined marginally in February, down 0.8% to $1,729 for one bedrooms and -0.3% to $2,245 year-over-year. Average asking rents continued to rise in Québec City, up 6.9% to $1,436 for one-bedroom units and 11.3% to $1,877 for two bedrooms year-over-year.

In Québec City, industrial availability is increasing slightly and reached 5.0% in Q4 2024, while available sublet space nearly doubled in the same quarter, to 116,000 sf. Net asking rents are now stable after three quarters of decline. With limited supply of industrial spaces in Montréal and a vacancy rate of less than 1.5% in 2024, however, industrial rents are expected to increase 8%-12% this year. New supply that meets ESG goals and is near transportation hubs will be quickly absorbed in the Greater Montréal Area.

Office vacancy rates in Québec continue to increase, with Class B vacancy stable at ~10% while Class A vacancies increased 130 bps to 16.4%. The trend of higher office vacancy rates is likely to continue as the provincial government is considering downsizing its office footprint. In Montréal the overall downtown office vacancy rate was 15.8%, although Class A buildings with amenities fared better. The trend in office for 2025 is for smaller spaces located closer to residential areas.

Overall, the need to adopt PropTech solutions to manage assets, improve the tenant experience, and streamline transactions is becoming more pressing while the demographic shifts resulting from an aging population and immigration will continue to create demand for multi-residential and healthcare facility asset classes.

Stay tuned for the next Real Insights report coming soon!

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