Current Issues in the Canadian Commercial Real Estate Market
As tensions between commercial tenants and landlords in Canada continue to rise, Peter A Saad of Loopstra Nixon LLP discusses the increasing focus on renewal provisions in lease agreements and the growth in purchases of commercial condos.
Historically, the Canadian commercial real estate market has been a stable and attractive option for both domestic and international investors. This is mainly due to the country’s strong economy and overall political stability, as well as the market being well-regulated overall. The market is particularly concentrated in Canada’s major cities such as Toronto, Vancouver, Montreal, Calgary and Edmonton. Each of these cities is a hub for business activity and general commerce, which in turn has led to high demand for commercial properties in all of them.
There are two aspects of the current Canadian commercial real estate market that are particularly noteworthy. The first is the ongoing challenges facing landlord/tenant relationships in respect of commercial tenancies in Canada, as a growing number of disputes over rental rates has resulted in tenants paying closer attention to renewal provisions in lease agreements. The second factor is that investors are increasingly thinking about buying commercial condos or units, having seen rental rates increasing in the Canadian commercial real estate market – although there are a number of different assessments that should be taken into account before making such purchases.
Why Are Tensions Increasing Between Commercial Landlords and Tenants in Canada?
Canada’s major urban centres such as Toronto, Vancouver and Montreal tend to have the highest commercial rental rates in the country. This is due to their comparatively large populations, robust economies, and high demand for commercial space.
Overall, the commercial tenancy market in Canada is presently choppy, with landlord/tenant relationships coming under strain. Commercial tenants are increasingly facing challenges, particularly when tenancies come up for renewals, as landlords continue to seek elevated rental rates while businesses are struggling with SG&A (ie, selling, general and administrative) expenses. As a result, the market has seen an increasing number of disputes over renewal rates in recent times, including disputes involving landlords who may be under financial pressure themselves.
“Most tenants are running on tighter margins due to inflation and are now also having to face increased rental rates based on historical ‘hot market’ conditions.”
In addition, the recent tensions between commercial landlords and tenants over renewals are being exacerbated as a result of the widening gulf between landlords’ expectations and the reality that tenants are currently facing. Specifically, while landlords have expectations on rent renewals that are based on historical “hot market” conditions, most tenants are running on tighter margins due to inflation and are now also having to face increased rental rates based on these older conditions.
Given these challenges, renewal provisions in lease agreements have become increasingly important to commercial tenants. Notably, tenants are seeking to have these renewal provisions be subject to arbitration. This will mean that. if a tenant cannot agree on a renewal rate with a landlord, the tenant will nevertheless have a path forwards that creates an opportunity to have an independent arbiter determine what is actually a fair rate for a renewal.
What Needs to Be Considered When Buying Commercial Condos in Canada?
As investors see rent rates increasing in the Canadian commercial real estate market, many are increasingly thinking about buying commercial condos or units. Such purchases come with different assessments in terms of what is important in the commercial condo under consideration. One important assessment that needs to be made is whether the commercial condo offers exclusivity to the buyer. And if it does, then the buyer needs to determine exactly how this exclusivity is set up – for example, is it included in the declaration?
The following are among the other questions that buyers need to consider when considering the purchase of a condo.
- Will the buyer be getting the full benefit of the condo?
- Does the condo corporation have enough reserve funds to cover claims?
- Are there concerns around the viability of the condo?
- Is there capex (ie, capital expenditure) coming down the pipeline in relation to the condo?
- Is the condo in question an older unit?
- Does the buyer need exclusivity to ensure they are the only provider in the condominium corporation? If so, have they reviewed the declaration to confirm they have these protections?
- Is the buyer’s permitted use already assigned to another unit?
Ultimately, potential buyers of condos need to consider exactly how all these assessments are going to play out when navigating a purchase. In other words, buyers need to consider how they will be impacted beyond just the purchase price when purchasing a condo.
Conclusion
First, given the increasing tensions between commercial landlords and tenants in Canada, it is now more important than ever that tenants pay particular attention to renewal provisions in lease agreements. Having a renewal provision be subject to arbitration will provide a way forward if there is a dispute over rental rates, in that it will enable an independent arbiter to decide upon a fair rate.
Second, the currently elevated rental rates in the Canadian commercial real estate market might make the purchase of a commercial condo seem attractive to investors right now. Nevertheless, potential investors should ensure that they consider a number of important factors when buying a condo, in order to ensure a smooth transaction and protect their interests overall.
Loopstra Nixon LLP
