It’s easy to get skeptical about leasing commercial real estate with all the media reporting business doom and gloom during the pandemic.
Well, I’m here to tell you not only is there rising hope on the horizon, but things aren’t nearly as dicey as some think.
Vacancy is to the market what weather is to the climate
Just because it’s raining does not mean we live in a tropical part of the world. So too could vacancy be compared to the market as a whole. So many factors go into vacancy that it’s tough to paint the whole market with the same brush.
The fact is when you break vacancy down by type and area, the pictures gets a whole lot clearer.
Saskatoon’s overall retail vacancy went down during the first part of 2021.
More specifically, the vacancy rate in east suburban shopping developments like University Heights, Stonebridge and Rosewood are down to only 2.62 per cent.
That means that landlords are far from desperate in these areas and that rates are holding steady.
In industrial, there is similar activity with almost 150,000 square feet of reported absorption over the previous quarter.
The vacancy rate for industrial in the Marquis and North Industrial areas are sitting at 3.96 and 3.98 per cent, respectively.
If you’re a landlord, those are incredibly favourable vacancy rates.
Comparing apples to apples
I’ve jokingly commented that there are a variety of ways to NOT lease up property.
However, there may be factors that can’t be resolved so easily.
– Is the property specific or widely functional to a variety of users?
– Are there parking or traffic issues impacting the viability of the property?
– Has the property outgrown its useful life and is need of a serious overhaul?
In the most extreme of cases, sometimes tearing down a building to recreate something more useable is the only way to get it leased again.
Long-term goals not just fast returns
We often spend time educating prospective tenants on the correlation of income to asset value.
A landlord with a 10,000-square-foot building on 8th St that was entering $25-per-square-foot net rents cannot afford to drop everyone’s rent by $5 per square foot.
Here’s why: $25 per square foot on 10,000 square feet is $250,000 annually. $5 per square foot on 10,000 square feet is $50,000 annually. A loss of $50,000 on $250,000 is a 20 per cent decrease in net income.
If that isn’t staggering enough, consider what a 20 per cent drop in income does to the value of the building when it’s based on the income approach.
$250,000 annual net income at 6.5 per cent capitalization rate = a $3,846,153 building. However, $200,000 annual net rent at the same 6.5 per cent capitalization rate = a $3,076,923 building
This means that a $5 per square foot rate reduction across the board could cost the landlord $770,000 if a sale were to occur.
As well, this can greatly impact financing and re-financing on developments.
Filling vacancies with low rents is a quick fix but will potentially result in a long-term problem.