top of page
  • Writer's pictureJoe Rosati

8 Things Tenants Can Do to Reduce Their Lease Costs in Today's Tight Industrial Real Estate Market

Rent rates for industrial properties in the GTA - warehouses, distribution centres, manufacturing facilities, as well as industrial land with outside storage capability, have skyrocketed in the last 5 years. To put it into context, the average net rent rate within the core GTA markets (Toronto, Mississauga, Vaughan, Brampton, Markham) was approximately $10 in 2018*, and in 2023 that number hovers around $20*. As maintenance expenses have creeped up (thank you inflation), the TMI portion of rent has increased by a fair margin as well (though not as dramatically as the net rent), and so a typical industrial warehouse in say, Mississauga, can easily run $20 net plus $5 TMI for a total of $25 gross per sq ft per year. On a 30,000 sq ft facility, that's $62,500 per month, which is a significant expense in absolute terms, but especially when compared to rates of the past.


So as Tenants compete for space within this tight GTA industrial property market, and as rents show no signs of going down (they look to be stabilizing potentially, but certainly not reducing), I'm always keenly focused on how to help my clients mitigate their leasing costs. There is no magic bullet answer to get your lease costs down, but there are certainly some strategies that can help keep them in check if you have the willingness and ability to explore them. Below are some options for doing so.


1 - Broaden Your Geographic Search Area

It's one of the first questions I ask of my clients when they are especially sensitive to rent price - can you be more flexible with your location? The reason I ask is quite simple - not all sub-markets have the same rent pricing for industrial properties. If you insist on being in Vaughan because that's where your staff and customers are primarily located, that's understandable, but be prepared to pay some of the highest industrial lease rates in the GTA. If on the other hand you have to flexibility to locate your operation in Newmarket or Barrie, then you will be able to realize a meaningful reduction on your lease rate. More examples: if you like Mississauga/Oakville but are willing to consider Burlington, Hamilton, and even the Niagara Region, again you will usually realize some material rent savings. As prices have appreciated for industrial leases, I have seen more and more of my clients, who in the past had a very narrow preference for location, reconsider their geographic requirement and become open to increasing their radius in order to save on costs. And in many cases, for those that made the leap to a market further from their original preference, there was not a substantial impact on the availability of staff/labour and on their supply chain.


2 - Live With Less

When you're in the market for a car, it's fairly intuitive that if you're searching for a luxury vehicle with all the latest features and fully loaded options, you'll pay significantly more than for a more economical option with less features. Industrial properties are not much different. For clients that want or need to have 30ft clear height, LED lighting, ESFR sprinklers, many dock level doors, and a modern built-out office space, it's understandable that the asking rate on net rent will be higher on such a property than on something older with less desirable features. I fully understand that some businesses have operational requirements for such features that cannot be compromised, and so they have no choice. But where there is any flexibility on building features, i.e. if you can compromise on the "nice to haves" versus the "must haves", then you can generally save a bit on the asking rent. The other implication is that the most modern features are generally only found on the newest buildings or those still in development, and there just isn't a huge supply of those to go around, and so naturally the available list of options will be reduced significantly.


The other obvious "live with less" strategy, and one that will provide an even more direct and obvious cost saving, is to reduce your required footprint. If you can live with 25,000 sq ft instead of 30,000 sq ft, you'll save money. If you can live with 60,000 sq ft instead of 80,000 sq ft, you'll save money, it's that simple. Again, not all businesses can condense their space requirement and many are also accounting for potential future growth, which is a prudent consideration. Automation and diligent space planning though can sometimes allow you to squeeze more productivity out of a space, and should be considered if you're looking to save on lease costs.


3 - Be Open to Sub-Leases

Though sub-leases are much less abundant for industrial properties than they are in the office market these days, there are still some decent sub-lease options available on the market. Typically, though not always, these spaces will have an asking rate that is below-market because it is based on the rate that was negotiated by the original tenant in the head lease, often a few years back when market rates where lower. For example, if a lease was signed in 2020 at $16 net and is put on the market in 2023 when market rates are closer to $20 net, there is a good chance the sub-landlord (the original tenant) will be willing to accept $16 net as it simply offsets their costs completely. Depending on how the original lease is structured, there may not be any incentive for the sub-landlord to try to achieve a higher rate, and so they are happy to take a rate that is below-market as long as they are held whole.

The issue with some sub-leases is the term. Because by definition a sub-lease is only available during the already-commenced term of an existing lease, there will be less years remaining on that term than there would be for a newly negotiated lease, and there may or may not be provisions for the sub-tenant (i.e. the new tenant) to renew or extend the lease beyond that term. But if a business is willing to take a reduced term period (say 3 years versus 5, depending how many years are left in the original lease) and is willing to live with potentially some uncertainty on extending beyond that, sub-leases can provide a viable and cost-saving option. It's worth noting though that most renewal options these days are based on market rates at that time, so in a sub-lease scenario where the new tenant has an option to renew, their cost saving will only be realized on the remaining years of the initial lease term.


4 - Go Vertical

This one varies depending on the tenant's use, but for businesses that can utilize more clear height - for example, if they have extensive racking requirements - going more vertical can actually be a great cost saving option. This one is somewhat counter to point #2 above where I mentioned being flexible with building specs such as clear height, but if you're able to utilize more clear height in an effective way, it can actually allow you to reduce your horizontal footprint (i.e. square footage) significantly, which will thereby reduce your rent costs. Since rents are priced on a per sq ft basis, if you're able to reduce that square footage by utilizing height - for example, by utilizing higher racking systems - then you can save on lease costs. Yes, higher clear height facilities tend to carry a bit of a premium on the asking net rents (the point I was making in item #2 above), but that pales in comparison to the direct cost saving of reducing your horizontal square footage.


5 - Demonstrate "Good Covenant"

We talk a lot in the industrial brokerage world about a tenant's "covenant" which in general terms refers to the strength/success of the tenant and is reflective of their ability to pay rent for the long term. As such, it considers factors like years in business, revenue, credit rating, industry/use, assets, etc. For tenants who are strong on paper on all of these items, they may be able to get a slight break on rent price since landlords may be willing to be more flexible on price in order to secure a strong and highly reliable tenant. That being said, in today's market, with how tight inventory is for industrial properties (vacancy rates hover around 1%), a strong covenant can simply be enough to secure a space at asking price rather than provide you with a significant break on the price. For that reason, maybe take this one with a grain of salt. Also, this isn't the kind of thing that can be influenced by a tenant in the short term just before they head out to lease a new property - it's rather the kind of thing that needs to be cultivated over the life of a company, often many years. Some ways to make sure your covenant is strong (other than saying "make more money") is to keep your financials in very good order, and keep your credit rating strong. These are the types of documentation items that landlords will want to check when considering your lease offer and so having these items in tip-top shape will give you a leg up.


6 - Consider a Longer Lease Term

This one has two schools of thought because the market has changed so dramatically. There once was a time when landlords had a clear preference for longer lease terms as it provided stability and predictable revenue for their property for many years. These days however, with how much rents have been appreciating annually, some landlords are ok with having (and some even prefer having) shorter initial terms since it allows them to renew the lease or sign a new lease at higher market rates. I include this one here anyway though because if you are able to secure a longer lease term (say 10 years rather than 5) with a landlord who is open to it, you may be able to lock in lease pricing (with reasonable annual escalations) that end up being lower than market rates as time goes by. Your industrial broker should be able to provide insights into market forecasts and what a reasonable escalation factor might be in order to decide whether signing a longer lease term has advantages or not.


7 - Act Decisively

I have had some clients in the last few years that have been so shell-shocked by industrial lease rates, and/or were so convinced that rates would come crashing down soon, that they dithered and stalled on securing a new space. I've had a hard time persuading the most stubborn of these clients that the fundamentals of the industrial market and the simple supply/demand dynamics meant rates were unlikely to come down and likely to keep rising, but all you can do is bring a horse to water. Six months or a year later, when these same clients were bursting at the seams of their existing location, or had an impending lease expiration and needed to vacate, they would call me desperately asking for me to help them find spaces, which of course I would, only for them to find that the same types of spaces they were looking at a year earlier had now increased in rent price by 15%. It would take me a whole other blog post to opine on the fundamentals of the industrial real estate market in the GTA and why we're seeing such strength, even in the face of economic uncertainty and weakness in other asset classes (like office), so I'll spare you that here. But the bottom line is that the market has been on a strong upward trajectory and by all accounts still has legs, and in such a market it can cost you to be indecisive and wavering in you property decisions, no matter how ugly that asking rent price looks compared to what you've been paying up to now. Chances are, it'll only get worse if you wait.


8 - Buy Something

What if I told you there was a way to reduce your rent costs to zero? Obviously I'm being facetious here but technically, that is what you're doing when you buy an industrial property rather than continue to lease. Of course there are a whole host of carrying costs, not the least of which is your mortgage payment if you require financing, but at least you'll own the asset. In owning the asset, you'll reap the rewards of an industrial market that strengthens over time (by virtue of your asset appreciating in value), which is in direct opposition to what happens when you're leasing - when you lease, if the industrial market keeps strengthening, it'll cost you more down the line (in higher rents). The other thing that gets flipped on it's head is that carrying costs such as mortgage payments tend to stay somewhat static over time, or may even diminish if the mortgage is renewed at lower interest rates, which is the opposite of what tends to happen with rent prices. And again, I can't stress enough that you'd also own the asset, with a rising equity position as your principal gets paid down and as the value (potentially) appreciates.


All that being said, I don't want to make it sound as though I am biased in favour of buying over leasing for a business that occupies industrial properties. Leasing is still a fantastic option, and in some cases, such as for businesses that continue to grow and hence have uncertain space projections going forward, or for businesses that can better deploy capital into other growth areas for their business, buying just may not make sense.


BONUS - REDUCING COSTS ON LEASE RENEWALS

I wanted to include this section here because there are a few different factors at play when a tenant is renewing a lease in a space they already occupy versus when they're signing a new lease in a new space.


Be a Great Tenant

When renewing a lease, though the landlord will try to maximize their rent revenue and at very least try to get the market rate, there are often other considerations they'll be open to, not the least of which is how much they'd like to keep a particular tenant in their space. As such, if you are strong and reliable tenant - always paying on time, not giving your landlord any problems, communicating and responding to inquiries promptly, taking good care of the property, etc - they will be much more apt to provide some flexibility on the renewal price just by virtue of wanting to keep you as a tenant. For landlords, even if they can squeeze an extra few dollars by losing you as a tenant and going on the open market, more often than not they would value keeping a known quantity that they have had a good experience with, even at the expense of some rent revenue. Keeping an open dialogue with your landlord and valuing your relationship with them can go a long way come renewal time.


Use an Industrial Real Estate Broker

Though it's standard practice for tenants to be represented by an industrial real estate broker when looking for a new property to lease, it's not widely known that they can also have this same service on lease renewals, at no cost to them (just as with new leases). Most lease renewals these days are subject to market rates at the time of renewal, and hence there is a negotiation that takes place between tenant and landlord at the time of renewal in order to come to an agreed-upon price. In addition, renewal time may be an opportunity to address any issues in the lease that the tenant has identified and would like to change. In order to get the best intelligence possible on rates and other items, it makes sense for a tenant to have a broker represent them on their renewal. At the very least, it'll ensure that the landlord is quoting them a fair rate which is reflective of the market and not trying to take advantage of them. Most industrial landlords are more than willing to work with a broker who is representing the tenant, and some even prefer it as it often streamlines and expedites the process. And since the landlord typically pays the tenant's broker's fee, this service is completely free to the tenant.



There it is folks - 8 things you can do as a tenant to keep your rent rates as low as possible, plus some bonus content for renewals. As I said at the outset, there is no magic bullet to get your rent price back to 2017 levels, but there are some simple strategies you can implement to make sure you're taking every opportunity to keep your costs down. Contact me if you have any questions and would like to discuss this topic further.


*Based on data from CoStar

151 views

コメント


bottom of page