Dale Willerton is based in Edmonton.John Ulan/Epic Photography
The commercial real estate market is experiencing a slowdown as businesses trim costs and make do with less - including office space.
Dale Willerton is founder of The Lease Coach, an Edmonton-based consulting firm that represents tenants and has operations in Canada and the United States.
He said in a recent Globe article that tenants have more options now when dealing with landlords, because the economic situation has changed. See article here.
Mr. Willerton has trained a network of franchisees dedicated to working with tenants throughout Canada and the United States. Health-care professionals such as dentists, chiropractors and physicians frequently come to The Lease Coach for assistance with their commercial office or retail leases. He has also advised quick-services restaurants such as Quiznos, Dairy Queen, Arby's and Moxies; as well as retail outlets by both independent tenants and franchisees such as Radio Shack, Sears, Telus Stores, Grower Direct Fresh Cut Flowers, GNC Nutrition Stores, and so on.
Mr. Willerton is the author of Negotiate Your Commercial Lease published by Self-Counsel Press.
He was here to discuss leasing trends/issues/negotiations for small businesses across Canada.
Christine Mushka, globeandmail.com: Hi Dale, and thank you for joining us today from Edmonton to talk about commercial property - both office and retail - and rent relief.
This is for all the folks who are not watching Michael Jackson's memorial service. The first question is mine: How has the leasing of prime, modern, well-located offices in Canada - often referred to as Class A space - been affected by the current recession?
Dale Willerton: Companies downsizing need less space and companies experiencing reduced sales can't afford the higher rent newer space. Less demand is driving rental rates down - which is good for new tenants and tenants doing lease renewals.
Christine Mushka, globeandmail.com: Is there a difference in what is happening in Canada and what is happening in the United States? Do tenants here have unrealistic expectations of landlords as a result of the U.S. experience where the recession appears to be deeper?
Dale Willerton: No, there is not much difference - it's more property-to-property, landlord-to-landlord differences than country-to-country. If a landlord has owned a building for 15 years and has little or no mortgage then they are much more secure than a landlord who bought a building for top dollar right before the recession and who is highly leveraged. Most tenants don't understand that some landlords can afford to hold vacant space while others cannot. Tenants seem a bit confused that they get a different story from one landlord to another.
Christine Mushka, globeandmail.com: Downtown Calgary - where oil companies are headquartered - has been flooded with sublet space. Companies have had several rounds of layoffs, and they need less space. With that sharp rise in vacancies, what will landlords have to do to sublease their space? Cut rents? Offer incentives? Improve the space by painting, or showing new tenants how the space can be refigured?
Dale Willerton: Sublease space is not a problem for landlords because the landlord is still receiving rent payments on that space (it's a problem for the tenants who are still paying). Yes, landlords will be doing all of the above to lease their space but the problem is not nearly as serious as the media is making it out to be. Most landlords have stable properties with stable tenants. Much of the time when a company downsizes it continues to pay its rent, but by laying off staff the company saves on salaries etc. Remember, in the past couple years office rents in Calgary have doubled and even tripled so for many landlords this is only one step back after 10 progressive forward steps. Sure, a few new buildings under construction will be affected more dramatically but overall the office rental market is very stable.
Christine Mushka, globeandmail.com: Do tenants often fall into the trap of leasing too much space?
Dale Willerton: Occasionally tenants lease too much space. We did three space reduction negotiations in the last couple months for tenants who had leased too much space but it's rare. If that is your situation then be aware that a landlord would normally rather reduce your area than lose your tenancy entirely.
Shelagh Oatway asks: We negotiated a new lease just last fall. The landlord gave us a price freeze on our rent for three years, but now I wonder if we will be able to get more given our revenue is down? What steps do you advise?
Dale Willerton: Tenants in general have reported very poor results negotiating mid-term rent reductions for themselves, of any significance, with their landlord. Often the landlord will give rent relief which mean you have to pay it back at some point in time (or if you sell your business). What you want is a permanent rent abatement and certainly not just a rent freeze. When a dentist recommends that you have a tooth removed he doesn't mean go home and do it yourself. It's difficult for me to recommend a method or strategy without being the one to implement that strategy, sorry if that sounds self-serving. I advise that you get some help from a third-party real estate professional who has done this before. Typically the process takes three to four months to reach a successful completion.
Dea Jozef from the Okanagan, B.C. writes: I have a commercial lease. I work in applied R&D internationally in medical devices.
My new basic rent rates are now approaching a reasonable level and have by hard negotiation dropped rates by 38 per cent in a newly negotiated short-term lease after naturally ending a long- term lease. ( As a negotiation tactic, I had already packed up the lab and offices when the owner came by and he saw I was serious about leaving and worked out a better deal on the spot. I was firm in leaving if I did not get a workable deal for my firm.) However the triple-net portion of the new lease is now almost 37 per cent of the new lease total costs due to overcharging and under serving by local government fees/taxes and surcharges.
How do I get a better deal on triple-net portion without having to leave B.C. for Alberta?
I can easily move my business as it is a 100-per-cent foreign- export focused and can set up anywhere. I can replace employees very easily due to computerization and having my core team willing to go anywhere due to high incentives. I like the area but not the cost of doing business.
Any advice?
Dale Willerton: Rental rates in Alberta are higher than in the Okanagan but CAM (common area maintenance charges) are similar. So don't rush to move to Alberta. If you are simply price sensitive to the CAM charges then you can try to negotiate. However, if you are suspicious that the landlord or property manager is fudging the numbers then you can have an operating cost audit done and that will reveal if their are discrepancies or overcharges. Landlords should not make a profit from CAM charges.
Christine Mushka, globeandmail.com: What criteria should a tenant use for choosing space? (Size, location, store-front location.) You say that too few tenants, such as the one who asked the last question, are willing to walk away from a location because the size, the space or the cost of doing business doesn't suit them.
Dale Willerton: Most retailers are shape and size sensitive. For a typical retail plaza you will want at least 20 feet of frontage. Anything less and your space starts looking like a bowling lane. It's almost always better to lease too little space rather than too much if you are uncertain. I recommend that you check out your competition and count their ceiling tiles. There is no one single answer to this question. We have tanning salon tenant/clients, for example,that are only 1,200 square feet right up to 5,000 square feet.
Now location is a whole different matter. When we do site selection for a tenant we are NOT looking for the cheapest space, but rather we are looking for the location that will allow the tenant to maximize their sales. The No. 1 reason business owners fail is poor site selection. Traffic flow, parking, visibility, proximity to competition or the lack thereof are all location factors. The hardest thing to renegotiate on a lease is the physical location so you've got to get it right. If you are getting site selection advice from a relative or from the landlord's real estate agent you might need another opinion.
Luke J. Schmidt writes: Good afternoon, Dale. Which markets in Canada, if any, are you having the most success in negotiating lower rents for the tenants you represent? Is there a specific property type (e.g. retail, office, industrial) that is easier to achieve concessions, or is it landlord specific? Generally, how much have the concessions been in the cases you have been successful in achieving concessions?
Dale Willerton: Typical rent reductions are 20-30 per cent mid-term or even more on lease renewals. In the United States one of our lease consultants just got a tenant a 50-per-cent or $6,000 per-month rent reduction on their lease renewal. That was in Michigan where the car industry is causing high unemployment etc. In Alberta and Saskatchewan the economies are still fairly strong. It is really a property-by-property process with no two deals being exactly the same. In Fargo, North Dakota, one of our consultants negotiated a lease renewal for tenant and got him a rent reduction, free rent, return of the security deposit and removal of the owner's personal guarantee on the lease. We're almost always successful but about 80 per cent of the time we save the tenant 10 times our fee or more.
Christine Mushka, globeandmail.com: Tell me about Phantom Space - which I understand is one of your favourite topics? Do you often find that tenants have leased 2,000 square feet, for example, the area actually measures much less?
Dale Willerton: If you live in Canada you are probably familiar with a franchise chain called Grower Direct Fresh Cut Flowers, about 160 locations. We measured their head office and discovered 800 square feet of Phantom Space. Instead of 4,400 square feet Grower Direct had only 3,600 sq ft of office space. We saved the tenant more than $50,000 in their first five-year term.
I saved my company accountant $3,200 by suggesting he let us measure his space. Even a small discrepancy over a number of years can really add up. Phantom Space is rampant. Just because the landlord or someone working for the landlord tells you a number you can't take it for gospel.
Simon Plant writes: I've just negotiated a 50-per-cent reduction for two years with one-half of my last month's deposit applied to the first month. Although I didn't use this service I have a very reasonable landlord. This sounds great, though, and I highly recommend it if your lease is up. I did drive the point home by clearing out a substantial section of the plant floor and invited the landlord in to see I wasn't bluffing when I said I didn't need all the extra space. I recommend you plan this at least one year before renewal as your leverage diminishes as your term expiry nears. Good luck, and hopefully some small business owners take you on.
Christine Mushka, globeandmail.com: Why are tenants not willing to aggressively negotiate on the rental rate? Is that a Canadian trait? Are we afraid of rejection? Or are we just too polite to go after the best deal?
Dale Willerton: Commercial or retail tenants have forgotten (or never knew in the first place) that the tenant is the customer. The tenant pays the rent to the landlord. Therefore the tenant is in control. Fear of losing a location, fear of making the big, bad landlord mad, fear of the unknown makes most tenants take what the landlord gives them.
No, this not a Canadian thing. The Lease Coach has offices in the United States and tenants there are no different than tenants in Canada. Ignorance, fear, insecurity etc. You might be the best florist, retailer, medical doctor or restaurateur etc. but that doesn't mean you know much about real estate leases. When a tenant feels ignorant about a subject (such as leasing) they tend to become passive instead of aggressive.
Christine Mushka, globeandmail.com: On that note, we end the discussion on rent relief for commercial real estate. This was my first opportunity to host a Web discussion. Thanks, Mr. Willerton, for making it an informative experience.