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In the downtown Toronto real estate market, five office leasing trends

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, arts 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 all 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 landlord mandates, not the other way around. As a result, here are some developments we’ve seen in the landlord market that you should be aware of as a commercial 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 in front of your eyes. This indicates that the demand for office space is so strong that brokers who are connected and transacting daily 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 owners? (If so, 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 tenants only.)

• 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, stay away from brokerages that operate under a residential banner. These agents would have less than sufficient industry support staff and, in most cases, far less knowledge of the business side of the market.

2. Multiple offers in good spaces

If you like a space, make a quick decision and make an offer the same day. For the first time in history, multiple office space offers 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 finances, credit scores and business data. If you provide these details in your lease offer, certain landlord conditional periods will be reduced to just five days. It could be accepted even less at best.

• Make firm offers. If you are sure you want the space, let the landlord know. This removes any lingering doubts.

• Know your options. Have 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. Landlords are reclaiming space

We have seen owners take advantage of the current higher market rates instead of keeping the original legacy agreements for the last two years, instead of simply authorizing sublease. In the landlord market, it might be more beneficial for the owner to claim the space rather than rent it.

If a landlord is reclaiming their space:

• Since this is primarily a relationship business, make sure you have a trusted agent whom the landlord respects.

• Tell your agent about your plans to sublease the space and ask the landlord in writing if they are thinking of taking it back.

• Allow the landlord 10-15 days to see if they have a tenant who is interested in renting it.

• 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 before, 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 will educate you on the most important risks of your mortgage, instead of highlighting the things that present little or no risk and are unlikely to be adjusted by the landlord anyway.

• Get legal representation with a referral. Your attorney can specialize in tenancy law and represent both tenants and landlords.

5. Fewer turnkey spaces available

All units require 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 ahead of time:

• For a big renovation, set aside about 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 apply for five-year leases.

• Find a contractor who can take you to at least three of your current commitments.

• Have a strong written contract that details a payment schedule, deadlines, and an exit if things don’t go as expected.

• To mitigate problems that arise during construction, your contractor should perform regular reviews and updates.

Commercial real estate brokerage in the Toronto market is hotter than ever, and finding space is getting harder, but there are still plenty of ways to be successful in the market. Maintain alert status. Start early and gather 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 on the quality of your company culture, motivating your team to work inspired and ready to work in synergy.

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