Five Office Leasing Trends Tenants Must Know In A Landlord's Market
Toronto continues to be among the best cities in the world to live in, and has earned this reputation for many different reasons. Toronto is home to Canada's top sports teams, entertainment, art and key business opportunities, not to mention its public health care and education, all of which make Toronto an ideal place to work and play.
Simultaneously, these are also contributing factors to an overwhelmed office leasing market. Factors that would normally keep the demand for commercial real estate under control have shifted tremendously. In today’s obscured market, tenants are experiencing mandates from their landlords, instead of the other way around. In light of this, here are some trends we can see in this landlord's market that you should be aware of as a commercial space tenant, and how you can protect yourself.
1. Off-Market Office Leasing
Know that these off-market transactions are happening right under your nose every day. This tells us that the demand for office space is so high that agents who are plugged in and transacting regularly can have renters in place as soon as space becomes available — even before it hits the market.
As a tenant, ask your agent the following questions:
• How many transactions do you complete in a year? (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: Stay away from brokerages that are operating under a residential banner if you are looking for office space. These agents will have a less-than-sufficient support team for this industry, and in most cases, even less information on the commercial side of the market.
2. Multiple Offers On Good Spaces
If you find a space that you like, be decisive and put in an offer the same day. For the first time ever, we are seeing multiple offers being placed on office spaces within the same week, whereas in the past, it would take 30-60 days before a space got its first offer.
To have a better chance of obtaining the office space you want:
• Have financials, credit scores and business information ready. Submit this information with your offer to lease, and some landlord conditional periods will be halved to just five days. In the best cases, you may be accepted in even less.
• Make firm offers. If you know you want the space, communicate that to the landlord. This reduces any pending hesitation.
• Know your options. Have your agent send updated selections regularly.
• Let your agent know that you’re willing to tour one space at a time in order to find the right one. Prioritize your schedule to make it happen.
3. Landlords Are Taking Spaces Back
Over the past two years, instead of simply approving subleases, we've seen landlords capitalizing on current, higher market prices rather than honoring original legacy deals. In a landlord's market, it could benefit the landlord more to take the space back than to rent it out.
If a landlord is taking their space back:
• Make sure you have a reputable agent who the landlord respects, because this is primarily a relationship business.
• Have your agent communicate your intentions to sublease the space, and ask the landlord, in writing, if they are considering taking the space back.
• Give the landlord 10-15 days to check if they have a tenant who would want it.
• Know the market rates for the building. If the landlord decides to take the space back, you should try to counter-offer with a market-price deal.
4. Unfavorable Lease Terms
More than ever before, landlords are creating their own standard lease forms and making very few, if any, changes to accommodate tenants' requests.
If you are about to sign a lease, consider the following:
• Be sure you are using an agent who has a background in contracts and understands the lease from start to finish.
• Combine your agent's skill set with that of a lawyer who understands the current leasing environment and the negotiating dynamic. Together, they can advise on the most significant risks in your lease, as opposed to highlighting items that have little to no risk, and that the landlord may not change in any case.
• Get a lawyer through a referral. Your lawyer should be focused on leasing law and have representation for both tenants and landlords.
5. Fewer Turnkey Spaces Available
All units need some degree of construction work. In today's market, with limited options available for lease, your ideal office space will likely require some kind of renovation.
To prepare for office renovations in advance:
• Budget approximately 10%, in addition to your annual rent, for a major renovation. This is a good way to determine the length of the lease you would like to sign. Many landlords are now asking for five-year commitments.
• Find a contractor who can walk you through at least three engagements they are currently working on.
• Have a good written contract in place that stipulates a payment plan, timelines and an option to exit the agreement if things are not going as planned.
• Your contractor should provide frequent walk-throughs and updates to minimize issues that come up during construction.
The commercial real estate market is hotter than ever, and spaces are getting more difficult to nail down, but there are still many ways to successfully navigate the market. Be diligent. Start early, and assemble the right team to support you from the start. Your workspace houses your most valuable asset: your people. 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.