It's Good to be a Tenant
In mid-2014 when oil prices fell below US$100 per barrel, Calgary’s office vacancy rate skyrocketed. And according to new data, this rate will only increase as new constructions near completion. Cresa Calgary, an international corporate real estate advisory firm that exclusively represents tenants, published in their Calgary Q4 Downtown Office Market Report that overall vacancy continues its ascent to record heights, reaching 24.34 per cent by the end of 2016.
The current state of the economy, as we all know, has resulted in job losses for many Calgarians. According to Statistics Canada, the unemployment rate as of the end of 2016 in Calgary remained the highest of any major city in the country at 10.2 per cent. That said, companies forced to downsize consequently no longer need large space – and offices are starting to look empty as a result.
Businesses and tenants have more options and leverage to obtain better lease terms due to the historically high amount of vacant commercial space available, says Grant Kosowan, president of Orange Group, a national advisory firm that focuses on commercial real estate, research and demographics, and business advisory services.
That is why it so important to understand who is representing you.
Adam Hayes, principal and broker with Cresa, suggests that while many large real estate firms in Canada claim to have better information and a deeper reach into the industry, smaller firms such as Cresa have a very solid market share in Calgary and have access to the same information as their competitors.
He also points out that, “the commercial real estate sector sometimes lacks transparency for tenants and the market is consistent supply side-oriented (landlord-centric).” He goes on to say the relationship between landlords and tenants is inherently adversarial and it’s important to have an advocate who represents the tenant’s interests only. This, according to Hayes, is the only way to find the landlord’s bottom line and push in areas others may not be as comfortable pushing.
Hayes quotes Peter Smirniotopoulos, a George Washington University professor, to help illustrate his point: “If legal ethics prohibit an attorney or a law firm from representing both the landlord and a tenant [in a lease] … how can the divergent interests of those same parties nonetheless be adequately represented by the same real estate firm?”
Kosowan echoes this sentiment and says it’s more likely conflicts of interest will arise when a brokerage company trying to represent tenants has several listings and management contracts. “Believing that one company can do all jobs effectively is analogous to believing that the plaintiff’s lawyer can also effectively represent the defendant in the same court of law.”
Our city is littered with leasing signs advertising vacant office space. When people call the number on the sign, says Kosowan, it’s important to understand the name on the sign actually works for the landlord/owner of the property.
So unless “dual agency” is disclosed beforehand, “a listing agent’s fiduciary duty is to the landlord while their legal obligation is to achieve the highest rates and best terms, also on behalf of the landlord. Given the substantial conflicts of interest that arise from these antiquated industry norms, many jurisdictions are making dual agency illegal.”
There are only a small number of firms that work for tenants only in North America and only two such firms in Calgary: Cresa and Orange Group. However, real estate firms that specialize in tenant-only transactions seem to be a growing trend in the U.S., and it’s likely the number will continue to grow throughout North America.
So why would someone want to deal with a tenant-only firm versus a larger brokerage firm? According to Kosowan, tenant advisory firms are growing quickly because of two main trends. The first trend was the Wall Street financial collapse “which uncovered the failure of regulators and highlighted undisclosed conflicts of interest in business.” This, he says, “ultimately led to higher regulatory and ethical standards in the U.S. and more scrutiny to protect consumers, companies and the public from conflicts. There are currently eight U.S. states and counting that have made dual agency illegal.”
The second trend is that today’s business leaders appear to demonstrate an increasing awareness of conflicts, financial acumen and diligence. More and more companies understand the value of retaining their own real estate experts given the enormous financial and functional consequences – even for small companies.
“Now more than ever, understanding how commercial real estate works and retaining good advice can have an immense financial impact on a business,” says Kosowan. “Dollars add up very quickly when you multiply the rent by the size of the space and again by the term of the lease – which often lasts up to 10 years.”
Downtown Calgary, in particular, is experiencing a very high office vacancy rate which is providing substantial opportunities for tenants to obtain low rents in high-quality spaces. Such was the case for H&R Block who was represented by Orange Group when they decided to relocate their Canadian head offices from Calgary’s southeast quadrant to the downtown core in the fall of 2016. As their advisers, Orange Group wanted to take advantage of an opportunity to obtain better financial and functional terms than what were historically possible.
“Serving taxpayers for more than 50 years, H&R Block’s relocation to downtown is reflective of the company’s ongoing growth and success in the marketplace, and will allow us to better serve the nation,” says Altaf Hirji, H&R Block’s AVP of real estate.
Hirji adds that while market opportunity and economics obviously played a role in the decision, there were other factors which led to the final decision. “Our move to the downtown core positioned us in the heart of the city accessible by all, which taps into a larger talent pool, and feeds off the vibrant and energized environment allowing our corporate culture of innovation and development to flourish.” Hirji is confident their decision to relocate the company positions them well for the future.
But what about leasing space in the suburbs? Wouldn’t it be more economical than the downtown core? Perhaps, but the downtown core also boasts an inventory of large spaces that cater to large oil and gas firms that just aren’t common in suburbia. “The supply/demand ratio in suburban areas is much more balanced and therefore rents have not been impacted nearly as much,” says Kosowan.
Hayes acknowledges that many examine the cost/benefit of moving versus staying, but at the end of the day “a majority of the tenants in the suburbs are there for more qualitative reasons (i.e. parking access, work/lifestyle balance, access/egress to certain quadrants of the city, etc.).”
So while there are obvious benefits to working with tenant-only firms such as Cresa and Orange Group, Craig Hulsman, senior associate with Colliers International, is quick to point out that tenant rep brokers can also find themselves in a conflict of interest position. For example, “how does a broker manage a conflict when two or more of his own tenant clients are favouring the same space?” He cautions it is important to consider potential conflicts of interest that may arise when dealing with any broker regardless of whether they brand themselves as purely “tenant-rep” or otherwise.