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.
