Toronto has maintained its position as one of the best cities in the world to live for a variety of reasons. Toronto is home to some of Canada’s best sports teams, culture, arts and key business opportunities, not to mention public healthcare 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. The factors that would normally keep demand for commercial real estate in check have changed dramatically. In today’s darkened market, tenants are subject to the landlord’s mandate, not the other way around. As a result, here are some developments we’ve seen in the homeowners 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 right in front of your eyes every day. This indicates that the demand for office space is so strong that brokers that are connected and transact on a daily basis will have tenants lining 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 owners? (If yes, there is a potential conflict of interest.)
• How big is your team? (If you are a team of four, your number of collective agreements should be 100-120, representing only the tenants.)
• Are 100% of your efforts focused on commercial real estate? (Hopefully so, and mainly in office leasing).
Warning: If you’re looking for office space, steer clear of brokerages that operate under a residential banner. These agents would have less than adequate industry support staff and, in most cases, far less knowledge of the trading side of the market.
2. Multiple offers in good spaces
If you like a space, make a quick decision and make a same-day offer. For the first time ever, multiple offers for office space are being made in the same week, whereas before, it took 30-60 days for a space to receive the first offer.
For the best chance of getting the office space you want:
• Prepare your financials, credit scores and business data. If you provide these details in your lease offer, certain landlord probationary periods will be reduced to just five days. It could be accepted even less at best.
• Make firm offers. If you’re sure you want the space, let the landlord know. This removes any lingering doubt.
• Know your options. Request that your agent send you regularly updated selections.
• Make it clear to your agent that you are only interested in going through one space at a time to find the right one. Make it a priority on your calendar.
3. Owners are reclaiming spaces
We have seen landlords take advantage of the current higher market rates instead of maintaining the original legacy agreements for the last two years, instead of simply authorizing subleases. In the owner’s market, it might be more beneficial for the owner to claim the space rather than rent it.
If an owner is reclaiming their space:
• Since this is primarily a relationship business, make sure you have a trusted agent who the landlord respects.
• Tell your agent about your plans to sublet the space and ask the landlord in writing if they are thinking of repossessing it.
• Give the landlord 10-15 days to see if they have a tenant who is interested in renting.
• Find out about the market prices of the building. If the landlord wants to reclaim the space, they can make a counter offer at market value.
4. Unfavorable lease terms
Landlords are producing their own standard lease forms in greater numbers than ever, with little if any modification to meet tenant 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 handle a lease from start to finish.
• Combine the agent’s experience with that of an attorney who is familiar with the new leasing environment and the negotiation process. Together, they’ll educate you on the most important risks in your mortgage, rather than highlighting things that pose little or no risk and are unlikely to be adjusted by your landlord anyway.
• Get legal representation with a referral. Your attorney can specialize in rental law and represent both tenants and landlords.
5. Fewer turnkey spaces available
All units need some level of construction. With limited leasing options in today’s market, your perfect office space will almost certainly need to be renovated.
To prepare for office renovations in advance:
• For a major renovation, set aside around 10% of your annual rent. This is a smart way to find out how long you want to sign the lease for. Many tenants also request five-year leases.
• Find a contractor who can get you to at least three of your current commitments.
• Have a solid written contract that details 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 perform regular reviews and updates.
The commercial real estate brokerage in Toronto market is hotter than ever, and finding space is getting harder, but there are still plenty of ways to succeed in the market. Maintain alertness. Start early and assemble the right team to help you succeed. Your people are your most important asset and they live in your workspace.
Putting the effort into finding the right space for your team will reflect on the quality of your company culture, motivating your team to work inspired and ready to work in synergy.