Premise Lease Negotiations

Tenants’ Dilemma: What’s Next?


Ian D. Toms


October 20, 2021

October 20, 2021

Where’s the refuge from the storm? So much is unfamiliar about the pandemic that it is impossible to make sense of what is happening. At this point, the uncertainty has gone into overdrive. As a result, tenants are scrambling and disoriented.

Although there is no clear path forward, it’s helpful to look at what occurred following global catastrophes in the past, what the current data reflect, and how to capitalize on future opportunities by taking control of one’s present position.

The Past

The Economist1 reviewed circumstances following massive disruption caused by global war and pandemics over the past 700 years and defined four helpful and consistent trends which may signal our direction moving forward:

1. Gross domestic product does bounce back. In fact, we are currently seeing that despite the continued disruption, many countries’ economies are growing faster than they did pre-pandemic.

2. People hoard money during the event and then spend some but not all following the event because uncertainty lingers. We are seeing the increased spending which prompts employment to recover and inspires innovative ways of doing things.

3. Crises encourage people to try new things, upending the traditional economic structure. We are seeing more people willing to try new things – notice the number of people moving out of urban cores to work at home, and the surge of new business start-ups. We also see e-commerce mushroom based on available technology supercharged by circumstances that have been dictated by the pandemic.

4. Political upheaval follows – history indicates pandemics expose and accentuate pre-existing inequalities. We see sexually and politically “out” Olympians and once again, our disgraceful treatment of the Indigenous people is top-of-mind. In summary, the world is significantly different than it was pre-pandemic.

The Current situation

In terms of your tenancy, you may have expected some sort of return to pre-pandemic conditions tempered with a softening of rent and lease terms along with improved tenant-negotiating power. Not so.

1. Vacancy rates are up only marginally – Market analysis data from CBRE2 indicates that vacancy increased only 4.2% year over year as of April even though malls and tenancies have been operating at reduced capacity or closed for the better part of a year. This may be due to the following reasons:

• Many lease terms are still a number of years from expiry,

• Government wage and rent subsidy programs have been extended;

• There is a significant supply of new space for rent coming onto the market,

• Tenants are sub-leasing recently vacated space to take advantage of low sub-lease rent and short-term length – strategic advantages in a changing market

• There is significant demand for new locations amongst new start-ups and relocations into better space

• “Work-at-home” is waning as people gain confidence and become frustrated with videoconferencing and lack of spontaneous in-person collaboration

2. Rental rates are holding the same – We are seeing rental rates “hold” flat. They are roughly the same as they were pre-pandemic. Data shows that despite differences between asset classes, the average rental rates are within 5% of pre-pandemic rates which is not significant. Landlords now seem more inclined to commit long-term at the same or nearly the same rates and to invest in tenant leasehold improvement money.

3. Lease terms and conditions are getting tougher – The landlords don’t know what’s going on either. One landlord told me bluntly that the term that is on his to mind is “chaos”. Landlords and their staff are experiencing burnout, fatigue and lethargy following many months of deal overload. Many landlords are trying to re-orient properties (e.g. trying to woo customers back into enclosed malls).

And landlords are not relaxing their guard. At its Hillcrest Mall location in Richmond Hill, Hudson’s Bay Co. stopped paying rent as it had only been open 40% of the time since the first lockdown. In addition, the tenant claimed that the mall was refusing to take appropriate safety measures including upgrading the HVAC system and that the mall had “changed in its character” because it deterred shoppers from lingering in stores and provided minimal food court seating. The judge ordered the tenant to repay and continue to pay rent. The tenants’ circumstances had changed; the lease and the landlord did not, and the legal system provided no relief.

As the residential re-sale property market soars out of sight, the pressure on landlords to convert commercial property to residential property makes the termination for redevelopment clause, so common in leases, even more difficult to manage.

4. Spending and social movement patterns are vastly different than pre-COVID-19 – The residential housing resale market is supercharged because new homes are hard to come by (hard to find building materials and trades), interest rates are low, and there are many work-at-home opportunities. Young couples are relocating from urban centres to smaller towns and communities. Housing prices will taper off over time as demand decreases in response to supply increases and increased interest rates.

Consumer confidence has rebounded to pre-pandemic levels. You know yourself how easy it is to buy online.

Where is this going and what should tenants do?

Everything changes. To see clearly and act appropriately, we must let go of the past and not worry about the future, however uncertain that may be. The sun rose this morning in the east and will set in the west this evening, as usual.

Both tenant and landlord strategies must evolve to keep pace with the new consumer dynamics and the current tenant landscape. Position yourself for success.

1. If it ain’t broke, don’t fix it. If your practice cruised through the depths of the pandemic just fine, then relax and rejoice.

2. If it is broke, fix it.

Everything changes. To see clearly and act appropriately, we must let go of the past and not worry about the future, however uncertain that may be.

• Consider relocating into better space as it becomes available. Define what “better” is and hire a professional to find the space for you.
• Consider a new location to take advantage of developing markets, specifically communities developing due to work-at-home re-locations and new housing starts. Define where that market is and understand what you need to do in order to proceed.
• Consider buying your building or relocate to another property. We are finding “off-market” opportunities are a very wise investment; you need to carefully compare the difference between continuing to wave goodbye to your rent dollars or invest in your own premises, even if it costs you a small premium in the short run.
• Consider the changed e-commerce & e-marketing opportunities to invite post-COVID-19 new patients to your practice.