Premise Lease Negotiations

Covid Opportunity for Tenants

By

Ian D. Toms

on

January 20, 2021

January 20, 2021

Patient demographic and economic change due to both the Covid-19 pandemic response and increased e-commerce continue to provide tenants with significant opportunities.
The downtown retail and office leasing market is and will remain stable even though buildings are sparsely attended. Over the next 3-5 years, office space rent payments will continue as lease terms run out until companies driven by work-at-home staff renew with smaller space requirements and the supply of available space increases which will, in turn, decrease rental rates. Retailers have been hit hard with some operators expressing sales in terms of hundreds of dollars per day; many operators have given up and handed the keys back to their landlords.
In mid-town and commuter urban areas, small office space is in demand as companies re-organize staff and client gathering space. The retail space market remains stable and rents remain at pre-pandemic levels because landlords are reluctant to increase rents in a weak economy but have to collect current rent values to maintain value. Vacancy is increasing as tenants in specific vulnerable sectors give up and walk away, especially sit-down restaurants, travel, fitness/dance/yoga studios, fashion and retail outlets who compete directly with Amazon. Larger landlords (example REITS) are maintaining the status quo because they can afford the cash. Smaller landlords (example private) are becoming more flexible but are still not desperate.
The pandemic and economic change is dramatic. Pivot on it. There is always opportunity in adversity. Here’s a once in a lifetime opportunity for tenants.
Purchase your own property now. We are finding small landlords – properties with less than five units for example, are deeply concerned and anxious about the long-term viability of their investment, especially if one or more tenants is struggling or has failed. Our experience has been that these landlords are far more receptive to an offer to purchase now than they would have been six months or a year ago. Our advice is to capitalize on this situation.

What’s different now?
First, dental clinics will survive the pandemic and most practitioners are financially comfortable and have bank funding facilities.
Second, interest rates are very low, and appear to be stable for the foreseeable future.
Third, the stock market is unstable, fixed income investment return is very low and real estate appears to be holding its value and is, therefore, a good investment.
Fourth, landlords are “concerned” with their commercial income properties, especially if they are “caught” in a cash flow or mortgage renewal pinch.
For example, suppose you are a dentist tenant in 1,500 sf of leased space paying rent of $32 + $18 psf or $75,000 per year, $6,250 per month plus HST. Over the next 10 years, at an average annual increase in rental payments of 3%, you would spend $971,563.80 with HST. In 10 years, you would still be paying rent with no equity.
Over the same period of time, relocating to owner-occupied property purchased now for $800,000 means a mortgage payment of $3,785.96 per month plus realty tax, maintenance and insurance the same as additional rent. In 10 years, if the property increases only 5% per year, it will have increased in value by $513,116 to be worth $1,313,116 and you would have paid off the mortgage principal of $278,038.42, increasing your net worth by $791,154.

Basically, your options are:

• Stay and rent - $0 gain.
• Leave and purchase - $791,154 gain AND control over the sale of the practice in the future.

Here’s how it works. The process to acquire owner-occupied property requires advanced experience and skill to put together. Both our lease term renewal and site selection services include a review of all listed property which we consider relevant. Until this perfect storm, it has been very unlikely that owners of off-market properties would be receptive to an unsolicited offer to purchase. What we recommend is that during both site selection for a new location, and for a lease term renewal, tenants strongly consider locating or relocating into owner-occupied properties.

Here are the steps involved:

• Identify the trade area for an existing or new practice based on our in-house demographic analysis software.
• Identify the primary activity areas within the trade area, and how a current location is related to those activity centres.
• Define the property search criteria in terms of size, zoning, parking, cost, time-line etc.
• Inventory the possible properties corresponding with these criteria.
• Analyze the inventoried properties to understand the likelihood of acquisition.
• Approach the owner(s) of likely properties with a rational proposal to purchase.
• Negotiate the purchase and sale.
• Build a new clinic.

In life, we can either spend our energy worrying about what we can’t do or don’t have, or we can move ahead and capitalize on opportunities. Our strong advice to you, at this time, is to consider owner-occupied property, and to enlist the help of seasoned professionals with proven track records of success.