With the vacancy rate hovering around 0.8% for industrial warehouse properties in markets like Toronto, Mississauga, Vaughan, Markham, and basically everywhere else in the GTA, the competition for spaces has become intense. Gone are the days when prospective tenants and their brokers could take their time touring and assessing properties for days or weeks before deciding to submit an offer. Gone are the days of being able to ask landlords for significant concessions, or in some cases any concessions at all.
So then how do you compete? What can tenants and their brokers do to give them an edge, to secure the most coveted industrial properties in the best markets? I take a deeper dive into that below based on what I'm seeing on the ground with my own tenant and landlord clients. The list below is a run-down of many of the most important items that determine the strength of an offer and which can help one compete in this crazy market.
Use and Covenant
I'm starting with this one because it's probably the most important factor in landlord's minds these days. In the current market, landlords know they will get their property leased quickly, and they'll get the prices they're looking for. Gone are the days when a property sits vacant on the market and the landlord starts to feel some desperation, causing them to have a more open mind about tenant's uses, track record, etc. Therefore, more often than not the differentiator among the (many) prospective tenants for vacant properties these days comes down to basically who they are and what they do.
Unfortunately, this is the one thing on this list that Tenants cannot change. A tenant cannot change on an offer to lease how long they've been in business, how much revenue they earn annually, or what their business does. The cruel reality of this is that many businesses that have less desirable uses in landlord's minds have a much lower chance of securing a space than they would have had a few years ago. That unfortunately includes pretty much any manufacturing use, automotive, anything that requires a spray booth, and really anything else that carries the risk of noise, mess, or environmental contamination, however small. It also includes businesses of any kind that are just starting out. Landlords prefer established businesses over startups, and in this tight market they can hold out for one rather than taking a chance with a new business.
It's tough reality, but working with a good commercial real estate broker can help to overcome this challenge to an extent. A good broker will have strong relationships with landlords and other brokers and can often leverage those relationships to get landlords and their agents to consider uses and tenants they may not have been initially as open to.
This one is fairly simple, but important. The number of years for the primary lease term in an offer to lease a space must at the very least meet the minimum that the landlord is asking for, and in some cases can give a prospective tenant a leg up on the competition (though not always). In this market, most landlords still tend to prefer longer leases of 5 years or more, and because of how tight things are they are getting those terms, to the extent that 3 or 4 year leases are rare these days. To be clear, I'm referring to the base or initial term here, though renewal options factor into the equation as well. Most landlords have preferences for initial terms as well as whether and how many renewal options there might be, and what the term lengths on those renewals are.
Therefore in any offer to lease, it's imperative for the tenant's broker to engage with the landlord's broker and determine what sort of term is preferable to the landlord and where there may be an opportunity to offer a term that is as appealing as possible to the landlord. In some cases, landlords are looking for as long an initial lease term as possible, and so a 10 year offer would provide an advantage over say a 5 year offer. In other cases, if the landlord feels that lease rates will continue to rise, they may be happy (or even prefer) to secure a tenant for 5 years and then - either through a lease renewal or by placing the property back on the market - take their chances on getting an even higher rate with a subsequent term. This one truly depends on the landlord, which is why it's so important for the tenant's broker to have the right conversations before submitting an offer.
Here is perhaps the obvious one in everyone's mind, and the most intuitive when it comes to any sort of real estate negotiation. Price is very important, but it's only one facet of many that is considered by the landlord and their broker. It's very plausible, and quite common, for landlords to accept an offer to lease that is at a lower price than another offer but was more appealing based on the other characteristics of the tenant and their offer. For example, a landlord that wants a storage use only and not any sort of manufacturing is likely to reject an offer from a manufacturing company no matter what price they offer.
Asking prices in today's market tend to be quite firm, with tenants having to be at the asking rate or above to expect any sort of realistic chance of securing the space. It sounds unfair, but unless the landlord's broker is completely out of whack with their analysis of market rates for similar spaces, the asking rents are usually based on some market reality. And if one tenant doesn't offer the asking price, another usually will in this market.
Don't get me wrong, I'm not advocating that tenants pay any price. I've actually advised tenant clients very recently to pass on spaces that worked well for them, but which I felt were overpriced relative to other spaces I was confident I would find for them, and where the landlord's broker indicated there was zero flexibility on price. Some landlords and their brokers are trying to take advantage of the hot industrial real estate market by pushing prices above the upper bound of what we're typically seeing in the market, and although rent prices may get there eventually, it can be a little too aggressive for this point in time. In these cases, the tenant and their broker need to weigh the risk of overpaying against the risk of not finding a suitable space within the required timeframe. That analysis usually provides some clarity on what the right decision is.
The last thing I'll touch on with regard to price is escalations. It's not just about the initial year-one price, but also each subsequent year's prices. We're now seeing typical escalation amounts in this market approaching 4% or 5% per year where 2% or 3% was more typical only a few years ago.
This may be like a small item, and it usually doesn't cause a lot of issues, but it certainly needs to be considered. Often, the landlord will have a specific date for when the earliest unit occupancy can take effect, and in many cases this is not flexible while in some cases it can be. In cases when the landlord is looking for a more immediate occupancy, offers to lease that provide an earlier occupancy and lease commencement date naturally have an advantage over offers that start later. When there is a specific date, it usually makes sense for the tenant to stick with that date in their offer and not try to delay beyond that date.
Fixturing and Free Rent
There was a time not too long ago when fixturing periods and free rent periods were a thing. I'm being a bit facetious here but it's actually not that far off from the reality on the ground within the last few months. Given how competitive the environment is for industrial warehouse spaces, and tenants having to truly put their best foot forward in what are often competing offer situations, asking for any significant free rent inducements or even any at all can often be the difference between your offer and another one. As a result, more and more of the offers I'm seeing - and writing - include either very short periods of free rent (and I Iump in gross vs. net free rent periods here) or none at all.
Prepaid Rent / Security Deposit
First and last month has often been a standard lump sum amount for prepaid rent and security, but more and more I'm seeing that landlords require an additional month (i.e. first month + two additional months) as a bare minimum. In some cases, tenants will offer even more in terms of security to beef up their offer further, especially if the rest of their covenant is not as strong.
The bottom line is the less you ask the landlord to do in a space, the better chance you have of securing the space. Often with industrial warehouse properties there isn't much to be done in the warehouse portion of the space, other than clearing out the items (racking, etc.) that currently reside there and leaving it as an empty shell. Where there may have been some landlord work required in the past was with regard to the office portion of the property, where it may have been negotiated that the landlord provide new carpeting, new lighting, possibly demise or add a wall here or there, etc. - however, these days it's rare that landlords will agree to do anything basically on industrial properties (different for office properties where these types of inducements still happen all the time).
Tenant Improvement Allowance
Similar to the point above, but even more rare I'd say. Basically, if you have a TA in your offer to lease for an industrial property in the GTA these days, you can kiss the space goodbye. We're not seeing any improvement allowances being offered whatsoever by industrial landlords - it's way too much of a landlord's market for that kind of thing right now.
This is a sticky one, but some landlords like to have this clause in a lease if they have even the faintest intention of possibly selling or redeveloping the property in the next 5-10 years, as it allows them to terminate the lease early. Even if there are no serious plans as such, some landlords just like to have the flexibility and option there. On the flip side, this is a very unfavourable item for tenants, and understandably so since it casts a cloud of uncertainty over the term of their lease since it can essentially be terminated by the landlord at any time (usually with 1 year notice). I fight tooth and nail to negotiate this item off leases for my tenant clients, or in the rare case negotiating that it only kick in after a minimum of 5 years when there was no other alternative and my client really wanted the space. If this is something that the landlord wants, the reality is that the tenants who are more open to allowing the clause to exist in the lease are the ones who are more likely to secure the deal. But as a tenant you really need to sit down with your broker and weight the risk of such a clause against the option to walk away and find something else.
Though I covered many items in this post that are factored into what may make an offer stronger than competing offers, this is by no means an exhaustive list and there are many nuances and variables to negotiating lease offers on a space. Perhaps the most important factor to give you an advantage in getting your offer accepted though is working with a solid and trusted broker who is not afraid to engage with the landlord's broker and other parties to try to find out which of these factors is most important to them and what is motivating the landlord in regard to their tenant preferences. If you have a broker like that in place, you're already ahead of most of the pack.