Behind the numbers - understanding the market stats

The statistics for the Toronto corporate and commercial real estate markets confirm that we are definitively in a landlord’s market. Vacancy is low; new premises are virtually unattainable; and tenants are forced to contract at rates near the top of the range or above market. It’s an exciting time for landlords and owners, at least on the surface.

At Cresa, our role is to dig deeper to better understand market conditions, and our clients’ organizational needs, and maximize value despite the constricted market. When doing so, we learn that there is much more to the story, along with a number of approaches clients may wish to consider to better align their decision about where to locate based on their internal requirements and budgets.

The industrial leasing market, as well as the office leasing market in the Downtown financial core, are at extremely high occupancy levels. New product is not being built/coming on-stream quickly enough to meet demand and provide more choice to companies needing office space.  Many brokers are feeling the pressure and are eagerly nudging clients to take down space quickly or otherwise lose the opportunity.

At Cresa we believe rushing to contract space ignores many of the guiding principles for leasing premises:

1. “The tail should not wag the dog.” What we mean is, offices are a tool for organizations to get work done. You don’t structure your business around the premises you lease. The key is to understand the work being completed today, how that might change in the future and ensure the premises leased support getting that work done. A decision made in haste about your real estate should not hamper or direct decisions of the company. This has the potential to result in poor alignment between the reality that you end up with in your real estate decision and what’s right for your business. This begs for organizations’ readiness. Has the company and key stakeholders truly invested in better understanding the needs of the organization? and considered the strengths or weakness of alternative solutions before contracting? If not, companies may learn the hard way that the route taken detracts from core goals, business drivers and strategic objectives of the firm.

    

2. Don’t paint the entire GTA with the same brush. Oftentimes, pockets within the GTA have somewhat diverging market statistics. Case in point: although we are experiencing a tight market in the financial core, that is not necessarily the case in suburban markets. Many nodes in tertiary markets, including Mississauga and Markham, are buoyant with significant opportunity at less heightened and more reasonable rates. How and why would organizations bear advantage? Cresa has many clients who have found that many of their employees prefer a suburban location where their staff can drive, are closer to home and children’s schools, and are burdened by public transit costs and delays - meaning they do not require expensive Downtown premises to attract and retain employees. Many industries and companies are also becoming more open to remote working arrangements.

    

3. If you were considering your personal real estate needs, we suspect the majority would not seek out a new home when the market is at or near its peak. Understandably, you would be concerned with the risk of the purchase maintaining its value. Similarly, companies are concerned with signing long-term leases at heightened net rates.

Unfortunately, the option to lease for shorter terms until a more reasonable rate structure is available is limited. Most lease renewal or extension options only allow for standardized terms, typically five years. So what options are available? Other than heated negotiation with the landlord, co-working has become an alternative for office accommodation. Firms like Spaces, WeWork and IQ all offer short-term solutions which can provide a stop-gap until better rates are achievable. Companies may enjoy the new structure and environment and decide upon this alternative on a more permanent basis.

As an aside, it is important for those negotiating for premises agreements to understand that Canada’s real estate ownership is somewhat of an oligopoly, especially so for office product, and is often distributed where the same owners of buildings in the tight financial core also have properties in the suburbs that impact overall returns. Leasing teams may have responsibility for a specific geographic location such as Downtown and therefore bullish, but higher up, management is looking at the aggregate portfolio including both suburban and urban locations. The take-away is a tight market Downtown does not define the landlord’s success, and therefore they remain motivated to get business completed.

Strategic organizations take a business-focused review of their stakeholder needs to best drive their real estate decisions. They adopt a practice of a facilitated visioning/discovery session that helps them understand the needs of organizational stakeholders: management, ownership and employees, to allow for informed, sustainable, supportable and long-term decisions. This lends to greater readiness when the right real estate opportunity avails. Further, a review of markets may offer alternative deal structures allowing for more equitable occupancy costs and yet, yield better benefit for employee groups.

So, don’t judge a book by its cover. With companies seeking out firms like Cresa they can better understand future state and more efficiently meet the needs of the company and stakeholders.