The Real Estate Podcast

Commercial Real Estate Talks: Leasing V.S. Buying, Vacancies, Deals! | The Real Estate Podcast EP313

In this episode, Ariel, Kristen, and Steve dive into the fundamentals of commercial real estate, from the pros and cons of leasing vs. buying for small businesses to the importance of understanding commercial lease agreements. Whether you’re a business owner considering a new space or just curious about the commercial property market, this episode is packed with insights to help you make informed decisions. ************************ 0:13 – Intro 0:49 – Meet Our New Team Member: Kristen Casarin 3:39 – Complexities in Commercial Real Estate 5:10 – Importance of Understanding Lease Terms in Commercial Real Estate 8:28 – The Pros and Cons of Leasing vs. Buying for Small Businesses 9:35 – Changing Trends in Commercial Real Estate Post-COVID 10:04 – Leasing Costs, Flexibility, and Overhead for Small Businesses 11:30 – Personal Story: Deciding to Lease vs. Buy for KT's Own Office Space 16:54 – Making a decision whether to buy or lease 19:35 – Commercial deals right now! 20:55 – Why companies are starting to bring their WFH employees back to the office 24:11 – Expenses of buying commercial real estate 28:46 – Outro/recap ************************ Want more real estate podcast discussions? Watch it here: youtu.be/uLhNb8fdHt4 Listen to it here: http://www.soundcloud.com/ktrealty Catch clips and highlights of the show here: http://www.instagram.com/kormendytrott ************************ Our Social: Instagram: http://www.instagram.com/kormendytrott  YouTube: www.youtube.com/user/kormendytrott  Facebook: http://www.facebook.com/kormendytrott  Twitter: http://www.twitter.com/KormendyTrott Soundcloud:http://www.soundcloud.com/ktrealty  LinkedIn: http://www.linkedin.com/company/ktrealty  Pinterest: http://www.pinterest.ca/KormendyTrott  TikTok: http://www.tiktok.com/@kormendytrott?lang=en ************************ In 2011, Ariel Kormendy and Adrian Trott formed The Kormendy Trott Team, now often referred to as KT (thanks to our logo!). The foundation of KT is built on providing unmatched value and attention to detail in everything we do. From our ever-expanding, comprehensive list of exclusive services to our expertly trained team, you will receive the highest level of care throughout your entire real estate journey. Originally a team of two in Milton, Ontario, the KT Team has grown into a large team of exceptional REALTORS®, a client-care department, and now includes KT media, KT Commercial and KT Property Management to provide our clients with a complete lineup of genuine, professional, and proven services across Halton Region, Peel Region and the surrounding Regions within the Greater Toronto Area. We’d appreciate it if you’d subscribe and follow us for behind-the-scenes footage, real estate tips, industry secrets, exclusive listings, The Real Estate Podcast, and more!

Duration:: 30m
Broadcast on:: 08 Nov 2024
Audio Format:: other

- If you're in the market, now we're in the very near future to buy or lease any type of commercial real estate, there are some fantastic deals out there. - Welcome to episode 313 of the Real Estate Podcast where myself, Ariel and Kristen, talk about some commercial real estate essentials. (upbeat music) - Welcome to the Real Estate Podcast, your go-to source for raw, unfiltered stories and expert tips. Whether you're a buyer, seller, tenant, landlord, or realtor, join us as we dive into the world of real estate. (upbeat music) - Well, hello, hello friends. - Hello, friend. - Hello, hello. - Hello, hello. Today's an exciting podcast because we have a new team member. - Very exciting. - Kristen Kasser, and welcome to KT. - Thank you, happy to be here. - Kristen's been in the industry for a long time, four years, the past four years as a licensed realtor in Milton and recently joined us and is going to be partnering up with Steve to hit up the commercial world of Halton, Peel and surrounding regions. So that's what we're talking about today. - Where need be? - Yes. - Yes. - Well, I'll start off the story and that's what we're talking about today is kind of the commercial real estate essentials. We're gonna talk about the two. You both picked a topic to talk about so we'll talk about your individual topics. But I'll backtrack, take a step back a little bit. We have talked, Steve's been on a couple of podcasts and been putting out some great blogs. If you haven't read Steve's blogs and you're interested in commercial real estate of any kind, buying, selling, leasing, some great content available on our website and a lot more to come. I wanna just take that step back for a moment because a lot of people, they know us and we've been in residential real estate for a long time and we have our property management company. We launched KT Commercial about 14 months ago or so. We started that process and the reason we did that was because we saw a glaring need in that part of the industry. Oftentimes if you scour realtor.ca is an example. You see a lot of listings that don't have photos or just poor marketing overall, the people that, the realtors that are doing a lot of the deals, they might do the off deal here and there. They specialize in residential but they don't really know what they're doing in commercial. And as you first started talking about that, that's what jumped into my head was commercial has been treated and still is for the most part, treated like a residential listing. But as we found out very, very quickly, this last 14 months, there's been a lot of learning that's occurred, there's lots of layers. I mean, there's lots and lots of layers and it's very complex, much more complex than residential and I think it needs to be treated as such. It can't be treated like a residential listing on the buy and on the sell and on the lease side. - Yeah, there's so many different variables, a lot of different dynamics to it and it requires a different level of attention, different level of wants and needs from the client. - And understanding. - Yeah. - And I think quite often, people are represented without that understanding. Like people don't know what they don't know and it doesn't add value. So a dedicated focus on that which we are providing adds that extra layer of value that I think commercial is entitled to. - Absolutely and Kristen will get into your topic in a moment, but I'll start with Steve because Steve, you wanted to talk about lease agreements. You've done some leases where commercial leases, obviously, where there were more intricate parts to it. So do you wanna elaborate on some, maybe some pitfalls and things to consider? - Yeah, sure and like we were talking about a little bit before, you can't treat it like a residential lease, okay? And one of the main reasons is there's two acts in place. There's a residential tendencies act and there's the commercial tendencies act. Very, very different acts and the residential tendencies act protects tenants very significantly. Whereas the commercial act leans a lot on the terms, the clauses, the things that are agreed to in the lease agreements, okay? So point number one would be make sure you're understanding everything that you need to protect yourself, okay? Because once that lease agreement is signed, it's a binding contract, okay? And I've actually seen cases where we were kind of on the outside looking in, trying to get a lease or move forward with a landlord and terms and conditions of a previous lease became limiting, okay? For the existing parties to get out, you know? Things like a fine, if a mutual release has to be signed, things like that, you have to make sure you're understanding what you're getting into and your needs are protected. So your lease term, your conditions, do you need a fixturing period? Like do you need time to get your business up and running? These are all things you have to negotiate upfront because once it's signed, you're bound by it. - And that's a great point about the different tendencies act because in a residential tendencies act, if you draft an agreement to lease on a standard Ontario Real Estate Association form, it's actually superseded by two things, by the Ontario standard lease and then ultimately by the residential tendencies act. So regardless of some of the clauses that might be in the schedules of the original agreement to lease, they could be totally irrelevant, whereas in a commercial transaction, especially a lease, things like even the renewal terms for that lease become a big component of that. - Absolutely. So the one thing that I've found glaringly different between a residential lease and a commercial lease is the need for professional assistance with a commercial lease. So, I don't know, what have I done? 7,500 residential leases, I can't think of one where we've suggested a lawyer review them, their terms and clauses and things like this. In a commercial lease, every single one that I do after acceptance, I advise that there's a period that a lawyer can review it. And this is just a lease, okay, just to make sure that the interests of the tenant are protected because what happens, there is also a standard form of lease that comes into play in commercial, but it's typically not a government regulated one, this is typically one that's been put forth by the landlord, that they've scrutinized, that they've evolved over time, that they've had their legal look at it. - That's more of their cheat sheet. - 100% and I just did one a month ago, there was a number of terms, conditions, that weren't agreed to in the offer of lease that we called them out on, okay, and they were totally fine. - Tried to sneak them in, did they? - Whether or not they did, I don't know. They were very quick to pull back and say, "Oh yeah, we forgot," but they were in there. And if we had agreed to them, it really tilted what we had spent a month negotiating into the landlord's favor. And it was a lawyer who picked those up. I don't speak legal lease. I understand the odd word here and there, but there's a lot of legal stuff that you get to know when to call on the resources of professionals. - Yeah, you can't pretend to know all the ins and outs and be that lawyer, but you are the first checkpoint. So you got to deal with somebody that understands those checkpoints, right? - For sure. - Kristen, you wanted to talk a little bit about the cons of leasing versus buying, especially for small businesses. So let me ask you something because I think there's, and maybe we'll chat about this part of this discussion after you answer this, because I think the commercial real estate market is going to change significantly over the next two, three years again. It did when COVID hit certainly. And I think we're gonna see a little bit of a wave or even a bit of a 180 where it starts to come back. I don't know your opinions, but we'll maybe round table that discussion. But if I was a small business, right? Certainly in the GTA, when you're consulting with somebody, so I'm the business owner and you're consulting with me, what might be the pros and cons that you're discussing between purchasing versus leasing right now in this market? Well, if somebody decides to enter into the market and wants a commercial space and they're a small business just starting out, there's a couple of options, as you mentioned, leasing versus buying. So when you lease, your upfront costs are significantly less. You don't have to make that big investment of purchasing a building in a space. You've got more flexibility. So if your lease term is three years, two years, five years, if you're outgrowing the space, you can pick up and leave 'cause your lease term is finished at that point versus when you purchase, you're kind of tied to that building. You've also got more overhead if you purchase where your overhead on a rental space is less. But if you do have that money and you are able to purchase a building, it can become an investment as well. You can rent it out and then move yourself to another location and have that rental income. So there's lots of pros and cons to each, but most small businesses that are just coming out don't have a lot of money. So the leasing option is probably gonna work better for them. They're just more flexible. They do face rental increases year to year. They're not usually that big, but they will face spending more money each year that they tie into that lease. - I can tell you from experience. So we've been in our current location now. Well, we got the keys at the beginning of the year. Steve actually did the lease for us. Thank you, Steve. - Best clients ever. (laughing) - I am. - Yeah, yeah, yeah. (laughing) - No, I want to tell you that it was a very tough decision for us. So our previous location, we had been there for seven years. And at that time, when we leased it, we really didn't have the capital to purchase. And we didn't, quite honestly, we didn't know if the space would be suitable. You're not allowed to cough. - I'm sorry, I didn't have to do that as well. - That's okay. - Yeah. So 70 years ago, when we went to rent this space at 75 Main Street, we didn't have the capital to say, okay, let's go and buy a space. Let's go and buy a building. More importantly, we didn't know the value that we would get out of having that space. It was more of a, let's try it. And we signed a three or four year lease from the onset with escalation each year. Here, Steve negotiated us a flat every month, the same for the 60 month term. - But yeah, bravo. But what happened was when our lease expired, three, four years in and we ultimately renewed, it's actually when COVID hit, right before COVID hit. And we had that tough decision to make because we knew we were, it was just after COVID hit, like it was May of 2020, something like that. And I'm like, well, eventually we're gonna get back to the office, but is it gonna change the landscape, change the dynamic? All of a sudden there's a lot of these cloud brokerages where they don't even have a brick and mortar location. And we put some thought into it and we knew that having the space was important for us. So we signed on for another kind of a year to year agreement with the landlord because at that time, we had a good relationship with her. But we went out on the hunt and we went and saw, over the course of the following, I would say 12 to 18 months, we looked at opportunities for buying spaces similar to this. - I'm not gonna say that, yeah. - In fact, there is one space very similar to this. I won't mention any names, but a competitor quote unquote, purchased that space and we had almost first dibs on it. And we looked at it, we ran the numbers, we had the capital and I'm very thankful we didn't go down that route for a couple of reasons. One, the price probably decreased a little bit since then. So this would have been about 16 months ago or so, mid to early last year of 23. The capital required, not only for your down payment, land transfer tax, lawyer fees, all that stuff. What the opportunity cost was of that capital expenditure. Of that capital expenditure. So I'll give you some rough numbers. Let's say it's a million dollars, which that particular place probably was very close to that. On a million dollars, it depends who your lender is. You probably gotta put 30% down. Well, that's $300,000 right off the bat. Then you have your land transfer, your lawyer fees, your closing costs, not including any renovation costs. So now we're talking $350,000 to $400,000 just to get into the space. And we were thinking about it going, well, what would $300,000 injected into our business do for the business in terms of growth and overall, well, here we spent some of it on nice new furniture, this great podcast room, people expanding in terms of support staff, marketing, advertising, equipment, all of these things. And we were like, yeah, you know what? We don't need to own it. - Yeah, it makes sense. - And what you've just said, and it popped right into my head as Kristen was talking, making a decision to buy or to lease, especially if you're coming from a spot where maybe it's a home-based business or maybe it's a remote business or a cloud-based business, but you need warehouse space, you need something to accommodate the growth of your business. Making this decision, it forces you to understand your business and know your numbers, okay? Like you really have to dive into your business and not just look at current needs, but long-term needs like you've just talked about, what are these opportunity costs that are being presented with a buy or with a sell? So it really forces a buyer or a tenant to understand their business. - Yeah, and I think from the perspective of leasing, like Kristen mentioned, it gives somebody that flexibility. So if you're trying to figure out that stuff, like if you're a new business, you might not have all the answers yet. And how many people come to us and say, "Yeah, I want to start a gym and I need a place, but I want to buy it." Well, you don't have anything to go buy. You don't know your numbers yet. You don't know what you don't know, right? - And on that same train of thought, if your business is accelerated and your exit plan is three to five years away and you're looking for items, they're going to increase that ticket price when you go to sell, maybe buying is a good option because as you brought up - See, I told you to do it. - As you brought up, you're looking for potential assets that are going to increase the value of the business as a whole if you are looking at selling an entire package. So understanding the now, but also understanding the future is important. - There's also, a lot of landlords now will give you free rent or tenant allowance to build out your space as you need. Everyone that I've done has had that component. - Yeah, which is really a good incentive for a new business. Like, oh, great, I get three months free rent. So I'm reserving those funds in case it takes a few months to get myself up and running and whatever the case is. But all the, as Steve mentioned, most of the landlords are doing that and why wouldn't they? - Well, there's a lot of options right now for a lot of great options, both to buy and to sell and to lease. Steve mentioned it this morning in our meeting where if you are now in the market, like as of November, December of 2024, if you're in the market now or in the near, very near future to buy or lease any type of commercial real estate, there are some fantastic deals out there and there are people that need to offload this, like landlords and sellers that need to sell or need to have it rented because their cost of carrying. - Yeah, I mean, all you have to look at, I mean, I know we often hear when the month, and they're probably out today or tomorrow, the monthly real estate stats come out for residential. We talk about days on market. I mean, you put a times 10 on that and then you're looking at certain segments of the commercial market. I mean, you look at office spaces, the majority of offices have been on the market for six, 12, 18, even more months. I just read something in the greater Toronto area, there's 20% vacancy in offices. So you tell me there's not deals to be had? Not deals to be had? - Yeah, and I think as the workflow changes and people are being ordered to come back into the office, that landscape is gonna change. - So this is what I wanted to talk about because we all think now that there might be that, and there's a lot of articles that are being written about it on a weekly basis where companies are now forcing their employees to, well, we're now spending $400,000 a year on this rental property for you to come to work and you don't wanna come to work? No, no, you're coming to work. That's what they're saying, right? So there could be that whole revitalization. - There is, but now that all these people, sorry, are coming back to work, they can't manage it. They can't support it. They don't have the tools to support them now. So that's happening for those that are choosing to do what they did then. - Continue the same way, yeah. - But what's also happening and I actually wrote a blog on this, because of what you just brought up, the panic that's now starting to form in certain segments, office spaces, for example, retail spaces, for example, that haven't been able to bring the tenants back in for whatever reason. Now municipalities are getting involved and starting to shake up the zoning a little bit to just try and get something into that space before it continues to erode and deteriorate and we know what happens in urban centers when there's vacancies, right? So now at the municipal level, people are starting to panic a little bit and say, okay, well, maybe we've got to rezone this industrial space to a retail space, to a commercial space, to whatever, just to get people back in and to kind of bridge a little bit with the core of our business, a lot of these office spaces now, I shouldn't say a lot, but some of these office spaces are now being evaluated to turn into residential condos or areas like that just to get people back into them, so. - Remember the- - Lots going on. - Tip-top tailor building. - Very long. - Yeah. - Those are some of my favorite lofts. - Are those the sugar lofts now or something like that? Or those different ones? - No, those are different ones. - Yeah, I know exactly what I'm talking about. These are like the trendiest, coolest places, but that I think happened kind of accidentally pre-COVID, they backed into those opportunities, now it's being actively considered, just to kind of gentrify these areas again because they're going without, you know? - Well, it'll be very interesting to see what happens in 2025 if the mortgage rates continue to go down because I know a big factor in these properties selling. - It's commercial lending. - It's commercial lending because commercial lending, typically you're two to three percent higher than what you are on the residential side, if not more, depending on your liquidity and your overall ability to get lending. So if you're going into a B or C lender, you could be at, like when we looked at, and this would have been late 2023, so mid 2023, okay? The rates and our credit is good, and we add the cash up front, and the mortgage rates were in and around the nine and a half percent at that time, nine and a half percent. So if you've got to borrow a million dollars, you're talking about probably an $8,500 a month mortgage payment. - And that's from a company with a good track record, good credit rating, not everybody's like that. - Well, if you're just starting out, you don't have that history, you don't have that equity, if you're a newcomer, a new immigrant. - It's like conservatively, you're looking at maybe 12, 13 percent, which is a lot of money. - So do you have any forecasts for 2025? I put you on the spot, the last podcast talking about-- - You put me on the spot. - Talking about residential forecasts, do you have any forecasts for commercial? - Quantitatively, no, but I think we're going to continue to see creative opportunities presented, I think more and more, because there's been a lot of kind of rumbling, I'm seeing more things pop up that are happening. So I think those unique create-- those unique things that are going to pop up are going to create opportunities for those that are-- they kind of think outside the box, because there is-- doom and gloom aside, there is people out there with money that capitalize on opportunities like this. So I think we'll see-- - The rich, good richer. - Sure, yeah, there's my forecast. - Yeah, there you go. - Kristin? - I think it's going to be interesting to see what happens, like especially in the retail sector, not the industrial in the office, in places like the GTA, downtown Toronto, where people would go to work and their lunch hour, they'd go shopping. It's not happening anymore. Everything is online, so during COVID, these industrial, small industrial spaces were getting snapped up really quickly, because people would have these home businesses and then just put everything in a warehouse and ship them out. So I don't know. I'm interested to see what's going to happen there with more and more and more online shopping and these people doing these eBay type of things where selling on eBay as a side business, it's becoming much more prevalent and heading out at lunch, like I mentioned, and going for your quick shopping trip, it's decreased a lot. So in terms of the retail, that retail sector, I don't know, I don't know. - It would be interesting to see what happens from a standpoint of what new opportunities are created right now. And my thought is we are going to see the younger generations that might not own residential real estate, be very interested in some capacity in the commercial sector, but from a perspective of collaborating with people that they know, like their sphere of influence, their network, and how they can make a space work, like I'm talking a 1,500 square foot space that all of a sudden there's six businesses that are somehow collaborating amongst each other. - Sure, a shared workspace, a shared workspace. And I'm not talking like a we work kind of thing, but we saw something similar downtown Milton where there was a few different photographers in one space and they split the rent and they each did their own type of photography, things like that. But what I'm thinking is from a online standpoint, like from online businesses, they each have their own need for space, whether it's recording a podcast or storing the things that they're shipping out, even these dropshippers, like dropshipping side hustles have become really big. A lot of them want a space to collaborate with others and network and all that. - So that's interesting 'cause I was thinking, when you asked predictions for 2025, I was thinking landlords, policy makers, municipalities, you're thinking it happens more organically from the people needing the space, potentially driving the decisions that are made. - That's good point. I think there'll be some of both. - Yeah, there will be like, it'll be that ice cream sandwich almost. - Yeah, for sure. - Ooh ice cream. (laughing) I like it. - For those of you watching or listening, thank you. If you are interested in anything commercial real estate related, Kristen and Steve would love to help you guys out. If you're in the Halton Peel Wellington Hamilton type of area, we've got our finger on the pulse for that. And anything industrial, anything retail, whatever you're looking for, drop us a comment, send us a DM, whether you're leasing, renting. - Starts with a chat. - Starts with a chat, that's a good way of putting it. And be sure to check out some of the blogs. Steve's been writing some good stuff. So I think that's it for today. - That was good. - Yeah. - All right, thanks guys. See you next time. - Thank you for watching. Thank you for listening. Please make sure to like, share, comment. If you have any questions at all, please reach out, we'd be happy to chat.