Toronto has maintained its position as one of the best cities in the world to live in for a variety of reasons. Toronto is home to some of Canada’s best sports teams, culture, art, and key business opportunities, not to mention public health care and education, all of which combine to make Toronto a perfect place to work and play.
At the same time, these are contributing factors to an overwhelmed office leasing market. Factors that would typically hold commercial real estate demand in control have changed dramatically. In today’s obscured market, tenants are subjected to landlord mandates rather than the other way around. As a result, here are some developments we’ve seen in the landlord’s market that you should be aware of as a commercial space tenant, as well as some tips on how to protect yourself.
1. Off-Market Office Leasing
Keep in mind that these off-market deals take place every day right in front of your eyes. This indicates that demand for office space is so strong that brokers who are connected and transact on a daily basis will have tenants lined up as soon as space becomes available – even before it appears on the market.
As a tenant, ask your agent the following questions:
• In a year, how many transactions do you complete?? (Hopefully, a minimum of 25 to 30.)
• Do you do any listing work for landlords? (If yes, there is a possible conflict of interest.)
• How big is your team? (If they’re a team of four, their collective deal count should be 100-120, representing tenants only.)
• Are 100% of your efforts focused on commercial real estate? (Hopefully yes, and mostly in office leasing.)
Warning: If you’re looking for office space, stay away from brokerages that operate under a residential banner. These agents would have a less-than-sufficient industry support staff and, in most cases, far less knowledge of the commercial side of the market.
2. Multiple Offers On Good Spaces
If you like a space, make a quick decision and make an offer the same day. For the first time ever, several deals on office spaces are being placed within the same week, while previously, it would take 30-60 days for a space to receive the first bid.
To have a better chance of obtaining the office space you want:
• Prepare your financials, credit ratings, and business data. If you provide these details in your lease bid, certain landlord conditional periods will be reduced to just five days. You could be accepted even less in the best-case scenario.
• Make firm offers. If you’re certain you want the space, let the landlord know. This eliminates any lingering doubts.
• Know your choices. Request that your agent send you updated selections on a regular basis.
• Make it clear to your agent that you’re only interested in touring one space at a time in order to find the right one. Make it a top priority in your calendar.
3. Landlords Are Taking Spaces Back
We’ve seen landlords take advantage of current, higher market rates rather than upholding original legacy deals over the last two years, rather than simply authorising subleases. In a landlord’s market, it could be more beneficial to the landlord to reclaim the space rather than rent it out.
If a landlord is taking their space back:
• Since this is primarily a relationship business, make sure you have a trustworthy agent who the landlord respects.
• Tell your agent about your plans to sublease the space, and ask the landlord in writing if they’re thinking about taking it back.
• Allow the landlord 10-15 days to see if they have a tenant who will be interested in renting it.
• Learn about the building’s market prices. If the landlord wishes to reclaim the space, you can make a counter-offer at market value.
4. Unfavourable Lease Terms
Landlords are producing their own standard lease forms in greater numbers than ever before, with few, if any, modifications made to meet tenants’ demands.
If you are about to sign a lease, consider the following:
• Make sure you’re working with a contract expert who knows how to navigate a lease from beginning to end.
• Combine the agent’s expertise with that of a lawyer who is familiar with the new leasing environment and the negotiation process. Together, they will educate you about the most important risks in your mortgage, rather than highlighting things that pose little or no risk and that the landlord is unlikely to adjust anyway.
• Obtain legal representation with a referral. Your attorney can specialize in leasing law and represent both tenants and landlords.
5. Fewer Turnkey Spaces Available
All units need some level of construction. With limited options for lease in today’s market, your perfect office space will almost certainly need to be renovated.
To prepare for office renovations in advance:
• For a big renovation, set aside about 10% of your annual rent. This is a smart way to figure out how long you want to sign the lease for. Many tenants are also requesting five-year leases.
• Find a contractor that can take you to at least three of their current engagements.
• Have a solid written contract in place that spells out a payment schedule, deadlines, and a way out if things don’t go as expected.
• To mitigate problems that arise during construction, your contractor should have regular walk-throughs and updates.
The commercial real estate brokerage in Toronto market is hotter than ever, and finding spaces is becoming increasingly difficult, but there are still many ways to succeed in the market. Maintain vigilance. Start early and put together the right team to help you succeed. Your people are your most important asset, and they are housed in your workspace.
Putting the effort into finding the right space for your team will reflect in the quality of your company’s culture, motivating your team to come to work inspired and ready to work in synergy