News

As quickly as boom turns into bust, the commercial real estate scene has changed in Calgary.

More tenants aiming to ride out the recession are asking property owners for a break on rents, even in the middle of their leases. And some landlords are listening.

“It [renegotiating rent] was very rare and very occasional in the past, and it is only since the recession that literally hundreds of … business owners found themselves where sales have gone down and the rents they had agreed to pay two years, three years and four years ago they can no longer pay,” says Dale Willerton, of Edmonton, founder of the Lease Coach, a consulting firm that represents tenants and has operations in Canada and the United States.

“We did one a month [mid-term renegotiation] in the past. Now we are doing three a week.

“We can typically get up to about a 40-per-cent rent reduction for tenants in the United States, less in Alberta, because things are still a lot better in Alberta, but landlords are willing to hold back the rent … in order to keep the tenant in business so that the landlord can maintain some cash flow.

“The landlord's hope, of course, is that we come out of the recession, that sales strengthen and things go back to normal,” Mr. Willerton says.

“ A lot of the landlords are saying pay what you can afford for now, rather than having the tenant leave and create another vacancy in a building where there are already empty spaces.”

While this rent-reduction trend may have started in the United States, it has hit Alberta and Canada and will continue, probably for 24 months past the end of the recession, he says.

In Calgary, the amount of sublet space available relative to the city's office vacancy rates is the highest it has been in years, CB Richard Ellis Ltd. reported yesterday in a survey of the second quarter that ended on June 15.

Office sublease space in downtown Calgary now accounts for a whopping 54.8 per cent of the total available vacant space.

Depleted oil prices have prompted many of the province's junior oil and gas companies to pare back.

In the second quarter, Calgary's overall vacancy rate went from 4.6 to 10.2 per cent, year-over-year, and is expected to reach just under 20 per cent later in 2009.

New construction is adding to the surging vacancy rate. Twenty-seven office buildings are being built in the city, of which 33 per cent remains available for lease.

“The deepening recession has prompted businesses across the country to continue to identify ways to trim overhead and pare back their need for phantom space,'' says John O'Bryan, vice-chairman of CB Richard Ellis.

“The trend of doing with less right now is especially evident in Canada's major office markets. However, it is important to note that the commercial real estate market typically lags behind the residential market by a few months, so we are simply now experiencing the slowdown that other markets went through in the last quarter.”

Rick Urbanczyk, senior associate at DTZ Barnicke in Calgary, says that tenants cannot normally renegotiate their rent in the middle of a lease. Under the law, they can be held to their leases.

“Where we are going against the norm in some cases now is some tenants have gone through the traditional route of trying to sublease … space that's not being used. If that hasn't been successful, or if they're in such dire straits that they're on the verge of possible bankruptcy, they will reach out and see if they can survive with other terms – then that's renegotiating the lease mid-term,” he says.

“I don't want to release who it was, but I had a tenant that [had] about 7,000 square feet, who basically opened their books up to the landlord.”

It was clear that the company would be unable to continue paying the high rents in the contract. Mr. Urbanczyk says the landlord is now faced with keeping the rent high and seeing the tenant fail after about six months, or dropping the rent and trying to keep it for another five years.

“That's the driving factor that some landlords have to look at,” he says.

Mr. Willerton says the attitude among landlords toward renegotiations is changing.

“Eight months ago, landlords were a bit arrogant. They were kind of heavy handed. Now that we are farther into the recession, they are almost taking it in stride. It's almost like: ‘I was expecting your call,''' he says.

A lot of the landlords are saying pay what you can afford for now, rather than having the tenant leave and create another vacancy in a building where there are already empty spaces.

“Nothing is being pulled over the landlord's eyes. There is a complete financial undressing of the tenant's business,” Mr. Willerton says. “When the landlord believes that the tenant is being honest and not hiding things, the more likely he is to give us the rent reduction.”

Mr. Willerton says landlords need to brace for change in the marketplace, “but they almost need to embrace their tenants. The average landlord does a terrible job on customer relations.

“They will alienate a tenant and then wonder why that tenant doesn't want to renew.

“I'll get a client and I'll say: ‘When was the last time you talked to your landlord?' And he'll say: ‘About four years ago.'”

Meanwhile, he says, tenants must realize that they have more options now when dealing with landlords, because the economic situation has changed.

Mr. Willerton recently helped 15 franchisees from one organization in talks with their landlords. “The most common thing I heard from the landlord was: ‘Well, I didn't even know they were in trouble.'”

The key is to communicate with the landlord, he says.

Bill Partridge, executive vice-president at the Building Owners and Managers Association in Calgary, says he has heard reports of tenants seeking to renegotiate rents in mid-term.

“Landlords are reasonable people and they are astute business people and they know what their properties are worth.

“There is a point below which they won't go. And, obviously, their livelihood depends on ongoing cash flow and revenue stream in their buildings. They are going to make a business decision.”

However, he disagrees that there is a need to improve customer service, which is already present to a high degree among BOMA members.

“We are here for the long haul. [Landlords] have a vested interest in keeping the tenant there and having a revenue stream versus having vacant space,” Mr. Partridge says.

“Relationships are everything and customer service is a strong indicator of it.”

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No room in Saskatoon

Good luck finding Class A office space in Canada's office hot spot – Saskatoon.

Tom McClocklin, president of Colliers-McClocklin Real Estate in Saskatoon, puts the Class A office vacancy rate at zero.

The number dropped to 0.8 per cent, which is effectively nothing, over the first three months of the year, according to data compiled by Colliers International. The overall vacancy rate for all types of office space was 4.6 per cent. The report also pegged Saskatoon's sublease rate at zero.

Phill Elenko, managing partner of ICR Commercial Real Estate in Saskatoon, says there is a small amount of office space, but only one crane on the skyline with a 50,000-square-foot building under construction. Some older buildings are being updated.

“Our city is driven more by the industrial sector,” he says.

Statistics can be misleading in smaller markets, says Mr. Elenko, who puts the vacancy rate for high-quality Class A office space at a low 2 per cent or 3 per cent. Industrial space is 3 per cent to 4 per cent vacant and retail 1 per cent, he adds.

Special to The Globe and Mail