The premises leasing landscape is very different from two and a half years ago.
Tenants have endured repeated lockdowns, global paranoia, anxiety and depression, economic euphoria over soaring property and stock market values. They’ve also experienced e-spending with confidence fueled by ultra-low interest rates and governments pouring stimulus funds into pockets, dramatic work-at-home demographic shifts, and bewildering e-communication advances.
Some tenants have fared very well with production significantly ahead of pre-pandemic levels by re-positioning their clinic to the work-at-home patient market. However, other tenants are emotionally exhausted by the grueling and long-term intensity of the event. Many practitioners have never worked so hard in their lives.
Then, there are many tenants who gave up despite government assistance, especially those who required in-person dealings.
As we emerge from the COVID-19 haze, most tenants are unaware that they are in a radically different leasing landscape. And, the change is not over.
Right now, we are seeing increases in interest rates, cooling residential and commercial property sales, supply chain issues, increasing inflation with talk of recession and staff shortages. Consumer confidence is weak. Spending patterns are different. At the same time, household financial positions are strong with significant on-board capital and equity reserves. Employment is strong. The Canadian residential mortgage system requires significant equity, and many mortgages are based on long terms at fixed rates which will protect residential property values. Commercial real estate continues to trade at stunningly low cap rates because commercial real estate, backed by leases, is a very stable long-term investment commodity. This is a correction, not Armageddon. The tenant landscape will continue to remain in a state of flux for the next 4-5 years.
Tenants need to manage their position by understanding exactly what their position is and how their lease affects their current and long-term situation. Taking the time and expense, now, to have your lease reviewed to ensure it aligns with your new business plan will be the best investment you can make.
1. Review your lease with an expert. Prepare to manage your lease term renewal options very carefully
Most tenants are not aware of strategies to manage their lease term renewal option. Many landlords hope tenants will not exercise their options to renew because they want to take control and adjust leases adding new conditions on their terms. For example, if a tenant fails to exercise an option to renew the landlord can and will add an early termination for re-development clause, force higher rental rates, eliminate the ability to assign, or delete options to renew.
If you do not manage your options to renew, you will give your landlord the opportunity to adjust your lease which could cost you the resale value of your practice.
2. Review your lease with an expert. Understand whether your rental rates are rational in a dramatically different market.
Most tenants are now paying rent based on rates established prior to the pandemic and are experiencing sticker shock as the rent jumps on renewal.
Currently, downtown office rental rates are the same high levels as pre-COVID-19 because the institutional landlords don’t want to admit there is no rental market and instead want to wait out current lease terms hoping for a miracle. Meanwhile, many office tenants are stuck with triple the space they require due to work-at-home realities and are subleasing excess space at rock bottom rates. Subleasing opportunities are not practical for long-term tenancies.
In many areas retail rental rates are dramatically higher than pre-COVID-19 to justify the high cost of property acquisition, high cost of construction and significant tenant demand for the space. Landlords also lost money during the pandemic and are adjusting their positions to reflect the new landscape.
Generally, tenants’ rent expectations are not realistic. Now, more than ever, tenants need to hire professionals who are capable in negotiating leases to identify the best position and strategy to develop and preserve tenancy value in terms of term length and assignability.
3. Review your trade area demographics with an expert. Your potential patient demographics have changed - has your marketing strategy?
Regardless of your clinic location, potential patient demographics are very different that they were 2.5 years ago. In some areas, there has been a significant increase in high quality patients who are working at home during the day and not commuting downtown. This group represents an opportunity. As such, you should re-assess your potential patient population.
Our in-house demographic software will enable you to compare your potential patient demographics for the census years 2016 and 2021 so you can recalibrate your expectations and marketing plan. You may choose to relocate your premises to make best use of the new landscape or refocus your marketing strategy.
4. Review your lease with an expert. Are you able to deal with your landlord or should you hire a consultant?
Landlords are more difficult to deal with now because they are emotionally exhausted, financially wounded and have experienced a high turnover of junior staff.
Formerly straight forward negotiations such as offers to lease, lease term renewal and lease assignment have become increasingly more challenging as the market has shifted, landlord and tenant expectations differ dramatically, and landlord representatives are not focused or just don’t seem to care. The typical negotiation strategy is passive aggressive; many leasing managers simply do not return calls or emails for weeks or months and when they do there is very little room for negotiation. It takes extraordinary time, patience and skill to deal with these people without giving up and giving in.
5. Review your lease with an expert. Does your lease align with your NEW business plan?
What is your business plan? Failing to plan is planning to fail. Your lease priorities have shifted, the leasing market has shifted, landlords approaches have shifted. You need to understand what these shifts are and how they affect your lease terms and conditions and implement a realistic and achievable plan.
This article was prepared by Ian D. Toms, Jennifer Madgett and Colleen Collins of Realty Lease Consultants Inc. who as lease consultants have advised dentists for over 26 years. Additional information can be obtained by calling 877 216 1013 or by emailing email@example.com. Visit our website at www.realtyleaseconsultant.com. This article is intended to provide planning ideas and is not intended to replace professional advice.