tenant

Are you an industrial tenant that can't find a building in Niagara?

If you’re an industrial tenant in St. Catharines or Niagara looking on commercial listing websites and noticing nothing with your criteria is coming up or if you’re calling real estate offices with similar results, that’s likely because there aren’t any… at the moment.

The best thing you can do is speak with a reputable commercial real estate broker and let them know what you are looking for and how long you can wait for it. I have conversations daily with tenant’s expressing this frustration, but, sometimes there is a solution if you talk to the right people. I have a database of properties that have leases coming due on the regular. Sometimes I have a creative solution. A conversation with the right commercial real estate broker can make a difference.

I had a conversation with an industrial tenant the other day discussing their timing and expansion options. I happened to make them aware of a building we can pursue in a few months with expansion options a year from now, an option he wouldn’t know about unless that conversation happened.

Right now I’m keeping tabs on the tenant’s looking and when availabilities come up I like to make them aware of it. If you want to be one of the tenant’s that benefits from opportunities that can be created by a commercial broker, please contact me. Don’t expect residential Realtor’s to be of the same level of assistance, their knowledge is usually limited to what is available right now, which isn’t much.

10 things to consider if you're a tenant wanting to buy a commercial or industrial building

I work with a lot of tenant’s and something I commonly hear from them is that their goal is to buy a building. Owning commercial or industrial real estate can be an excellent investment and a worthwhile pursuit, however, I have discovered that most tenant’s with this goal aren’t aware of what is required to buy a building when they make this statement. Not only do I do commercial and industrial leasing, I also do sales, and I want tenant’s to know what the process is like not because I want to discourage them, but because it’s a process that is approached best with eyes open and expectations realistic. I would say most tenant’s abandon this pursuit after learning about the requirements and the process.

To start, the biggest thing you need to know is that getting a commercial real estate mortgage is way different than getting a mortgage for your home for many reasons. It’s common to encounter large downpayment requirements, fees, appraisals, an environmental site assessment etc. which adds time to the approval process. Many residential mortgages achieve approval within a couple weeks, but on the commercial side it could take months. Below is a list of things to consider before you even start looking at properties for sale.

1) High Downpayment Requirements - Probably the most notable obstacle for buying any real estate is ensuring you have enough for a downpayment. In comparison to residential mortgages that can offer a great deal of flexibility on the down payment requirements, it’s common to see a demand of 25% - 40% downpayment. I’ve met many business owners that have assumed this requirement can be much lower and have come to realize they just don’t have the ability to put together that much cash. There may be some flexible exceptions out there through private lending options or through the BDC that can present better options for buyer/users but this is dependent on the business.

2) Bigger Deposits - With bigger downpayment requirements comes the need for bigger deposits (and for other reasons). It’s common for knowledgeable commercial real estate brokers to try and achieve a deposit around 10%. Why? Commercial sales can take a long time to come together and if you’re expecting to tie up someones property with lengthy conditions you need to prove that you’re worth the wait, and, show that you obviously have a good chunk of cash ready for a downpayment. If you’re expecting to tie up a property with a few grand, you may be perceived as unrealistic.

3) Longer Closings - In comparison to home sales which can go firm within a couple weeks, it’s common for commercial sales to take a couple months, sometimes even longer depending on the structure of the deal. The main culprit for longer deals is usually the financing where lenders request environmental site assessments that can take anywhere from weeks to months to complete. It would be wise to expect occupancy of the building to be months into the future, don’t expect to be moving your business in within the span of a month. It’s not impossible, just very unlikely.

4) Different Mortgage Requirements - In addition to high down payment requirements, commercial mortgages are typically structured differently. The interest rates are different from residential and it’s not common to get an amortization period as long as you could achieve in a residential mortgage. Not only are the down payments higher, your mortgage payments will be higher with having to pay the building off sooner. It’s also common to come across fees in the process of commercial lending which is not something you typically encounter when buying a house.

5) Environmental Site Assessments - In Canada (and probably most of the United States) it is standard for commercial mortgage lenders to request an ESA for commercial and industrial properties to prove it is within ministry of environment standards. Most times it is standard for the seller to prove the property is within MOE standards so the cost of the report usually falls on them, but, this condition can take anywhere from weeks to months to complete which can create a lengthy conditional period and a potentially drawn out closing. Things usually get drawn out and costly if contamination is discovered.

6) Lender Selection - You would think that most of Canada’s big banks are a great source for a commercial mortgage but few actually specialize or excel in offering this service. If you’re not exactly happy with your preferred bank for commercial mortgages you may want to explore lenders that specifically market themselves for that service.

7) Borrowing Potential - If you think that owning a building might be the best thing for your business, it actually may not be for everyone. Each business only has the potential to borrow so much money and if it’s perceived that most or all of your borrowing potential is tied up in bricks and mortar, it may be difficult or impossible to borrow money for other business purposes, like if you wanted to borrow to upgrade some expensive equipment or make alterations to the property. Unfortunately I have met some tenant’s who have felt that buying a building paralyzed their business growth and regretted their decision. The positive idea of building ownership can make you blind to this potentiality.

8) Lease Payments are Tax Deductible - Mortgage payments… not as much.

9) Cost of Alterations - Unless you’re building new to spec, you will likely find it impossible to find a building that is perfect for your business needs in its current state. Alterations to make sure the building is a good fit for your business are almost always necessary because the previous business was different and had different layout needs than your business. The cost may not necessarily be high in some situations but you will want to make sure you have a proper budget allocated for this after closing.

10) Maintenance and Repairs - As a tenant the building is likely repaired and maintained by arrangements through the landlord or a property management. This is handy because it allows tenant’s to focus on their business and not maintaining a property. Once you buy a building you become the landlord and are now responsible for arranging repairs and maintenance, just something to keep in mind.

If after reading this you feel that buying a building is the right thing for your business then please reach out and lets see if there are some options available for you in the Niagara Market. It would be wise to ensure the agent you’re working with has experience with commercial or industrial real estate sales.

What is a Commercial Real Estate Sublease?

Sometimes a tenant can’t fulfill its obligations to complete its lease term. The reasons a company could entertain subleasing their space is they may have outgrown it and needed to relocate, there may be cutbacks and a need to downsize, Corporate office may decide that a location is no longer needed or it needs to be relocated, or the tenant may be going out of business. Regardless of the reason, most leases contain an option to sublease, also known as sublet.

What is a sublease? Subleasing allows the tenant to lease to a sub-tenant for some or the remainder of the lease term to reduce the financial burden of paying rent on a space that is not being used. With the options mentioned above a company or an individual that signs a lease is obligated to fulfill it to the end of its term. For example, if a tenant signs a 5 year lease and can’t fulfill beyond 3 years, they could opt to sublease the unit for the remaining two years.

There are some things to keep in mind when subleasing so it’s best to read your lease and know what your options are. The positives of subleasing are obvious in that you can relieve financial burden on paying for a space that isn’t needed anymore. Some of the negatives are finding a sub-tenant which is not always quick or guaranteed, not being offered the full rent by a sub-tenant, being potentially responsible or liable for the sub-tenant, and in most cases you are still on the hook to fulfill your obligations of the lease even though someone else is using the space now. That last point is of particular concern because the original tenant may not realize its subleasing obligations under the lease. Even though there is a new tenant using the space, that new tenant pays you rent, you in turn are still obligated to pay the landlord your rent and you are still obligated to ensure the lease is complied with.

There are many more aspects to subleasing and if it becomes an option you want to consider, be sure to connect with a knowledgable commercial real estate broker in your market to ensure you know your options.

In some situations there may be potential to assign your lease instead of subleasing but I’ll be covering that in another blog. Keep in mind a sublease can be entertained on just about any commercial property whether it be office, industrial, retail, medical, etc.

What expenses can be used in TMI, CAM, or Additional Rent in a commercial real estate lease?

What should be used as a TMI expense is dependent upon how the lease is written, but, the vast majority of the time I write triple net leases and I know most commercial and industrial landlords and practitioners prefer triple net leases where they can be applied, The list below is based on a triple net scenario and isn’t limited to what is listed:

1) Landscaping - The property needs to look well maintained to make a good first impression in a business situation. Lawn cutting, gardening, weeding, tree and bush trimming, litter pick up, and so on can be a landscaping expense.

2) Snow Removal - If you live in a province or state that gets snow, snow removal contracts are a necessity for commercial and industrial properties to ensure businesses and customers have a place to park. Salting and Sanding also falls into this category.

3) Parking Lot Repairs - Parking lots function and look best when the pavement is smooth and free of potholes.

4) Roof Repairs and Maintenance - There are various things that can cause a leak in the roof but leaks tend to occur most towards the end of the roof life. Fortunately repairs can be made and the roof can often be functional for years longer with proper maintenance. There will reach a point where repairs won’t work and a full replacement will be necessary.

5) HVAC Maintenance and Repairs - To ensure the longest life and most efficiency of your HVAC units you should have a regular maintenance contract. A few visits a year from an HVAC technician to keep the unit clean and running smoothly is a wise idea.

6) Outdoor and Common Area Lighting Costs - Tenant’s and Customers definitely appreciate it when coming and going during darker hours of the day, and, having a lit building is a bonus security feature.

7) Property Management and Administration Costs - Property management takes time and money. It would be rare to see management fees higher than 15% of the property expenses but this depends on the landlord and management company.

8) Elevator Maintenance - Elevators require monthly maintenance contracts to remain operation.

9) Waste Removal - If you have common waste, recycling, or compost bins for tenant use.

10) Outdoor/Common Walkways, Ramps, or Stairs - Need to be maintained to code for safety.

11) Fire Prevention - For buildings with sprinkler systems, common area alarms/detectors, these are items that have maintenance costs. Depending on the situation, most times tenant’s would have alarms/detectors in their own units at their own expense.

12) Security Systems - For common areas only. Tenant’s should do their own monitoring for their own unit.

13) Electrical - Maintenance of the electrical room or main transformer.

14) Water - Most units of commercial and industrial buildings don’t have a separate water meter. Water costs should be added to the TMI in this situation, except if there is evidently a tenant that uses more than the others, a fair approach to billing should be made.

15 Insurance - For building and land. Tenant’s should be providing their own content and liability insurance as per the lease.

16) Property Taxes - The largest and most obvious expense.

This list can and will be more extensive in the future, but for now this is a good base guide.

Depending on the wording of your lease you may be able to amortize capital improvements over a longer term. The default wording of my lease allows for roof, HVAC, and parking lot replacement costs to amortized over 10 years but this isn’t used in all documents.

If you’re a client of mine that needs some assistance with best TMI practices I have no problem offering that help. Make sure you work with a Realtor that knows all of the expenses that need to be accounted for.

The Industrial Business Parks of St. Catharines

Searching for industrial buildings for lease or sale in Niagara won’t provide you with many options in our current market, especially if you are looking in St. Catharines. It’s a market where you will need to act quick if you do happen to find industrial space for lease, but where should you focus your efforts in searching?

St. Catharines has five main industrial parks to look into, each with its own advantages. I separate each with the labels of the East End, West End, Port Weller, Hiscott, and Secord/Nihan. There are some pockets of industrial buildings that can be found throughout the city, however, the majority of industrial buildings and businesses can be found in these areas.

Arguably the largest industrial park in St. Catharines is the East End which is bordered by the canal to the East, Welland Avenue to the North, The service roads (Dieppe and Dunkirk) to the South, and it sort of sprawls West past Bunting along the highway and service roads and even a little past the other side of the highway on Welland Ave and and Berryman. The closest highway access point for this industrial business park is Niagara Street at QEW. The types of businesses in this area are a diverse mix and the street often has a reputation for catering to specific industries. Take Bunting Road for example, you will find a lot of showroom uses often catering to the home/building improvements, home and building decor, and furniture. The service roads, and Welland Avenue will offer some service based industries as well as warehouse, distribution, and manufacturing. Cushman Road and Seapark Drive attracts mostly warehouse and distribution with some heavier manufacturing uses mixed in. There seems to be quite a few cabinet makers in the area along with some automotive uses if the building allows for it. The advantage locating an industrial business in this area is that the rent is usually reasonable, and with being the largest industrial park there are often other businesses in close proximity you can create a working relationship with.

Depending on the type of business you operate, the West End industrial parks of St. Catharines have been growing rapidly and may be the most sought after location for cleaner industrial uses. This area is comprised of Vansickle Road to the West, Louth to the East, St. Paul West to the South, and Benfield to the North… and even though it’s a few minutes up Martindale, I classify the business park on Hannover Drive to be part of the West End industrial park because the types of buildings and businesses they attract are quite similar. As far as industrial real estate rents go, the West End tends to have the highest in the city, and because most of the buildings are newer and offer some different zoning options, the additional rents are often higher due to higher property tax. The advantage comes to those who want a building and location with a more prestigious look which mostly caters to the showroom, service, and distribution based businesses. While you can certainly find manufacturing in this area you definitely won’t notice dirty operations. The West End industrial business park of St. Catharines enjoys highway access from QEW at Martindale Road as well as Highway 406 at Fourth Ave.

Port Weller, in my opinion, is an unusual location for an industrial park. Back in the day some businesses may have set up shop here due to proximity to the canal and lake access, but it has grown and expanded beyond that. The area is setup with Lakeshore Road to the South, the canal to the West, Read Road to the East, Northrup to the North, and Keefer Road running down the middle. The advantage to being in this industrial park is that it usually has the lowest rents and sale prices in the city, but that comes at a cost. For an industrial park, Port Weller can be a bit isolating for multiple reasons, mostly to do with location. Industrial businesses tend to enjoy close highway access but in this park, it can often take 10 minutes or longer to get and from the highway, or much longer if the bridge is up. The other location disadvantage is that this area is on the other side of the canal from the rest of the city so in terms of access and amenities most things are on the other side of the canal bridge which goes up and down for ships most of the year. Not only is this area a considerable distance from the highway, employees and deliveries can be frequently delayed by the canal bridge. Speaking of employees they will need to have a car to reach this area of the city because the bus service ends on the other side of the canal. Businesses that are attracted to Port Weller due to the cost difference should definitely keep the location disadvantages in mind before committing your business to being there long term.

I consider both Hiscott and Secord/Nihan industrial parts to be small but centrally located with very quick highway access through QEW at Ontario Street or Lake Street interchanges. The buildings in these neighbourhoods often cater to smaller uses that are service, showroom, or distribution based. Rents in this area are fairly average but can easily be as high as the West End depending on the quality of building and location and vacancies are usually rare.

So there you have it, a simplified breakdown of the industrial neighbourhoods of St. Catharines. If you are having difficulty determining where is right for your business, don’t hesitate to contact me for more detailed insight.

Industrial Market Update: Where can you find industrial space for lease?

If you are an industrial tenant in St. Catharines or the Niagara Region looking for space under 10,000 sq. ft., you have probably noticed there is little or nothing to pick from. We have reached a point in our market where if something comes available, tenant’s need to act quickly. This is especially true for quality industrial space which there is indeed a shortage of. I’m now in the habit of listing leasing opportunities well in advance of their occupancy date.

At the moment I have two great industrial spaces coming available in 2019 at 101 Hannover Drive in St. Catharines. The building is located in a professional business park very close to the QEW highway and Martindale Road, surrounded by plenty of amenities.

The first unit is 5600 sq. ft. and will be available in April or May. The unit features 18 ft. clear height and a grade level door. The space is still tenanted so interior photos will follow.

The second unit is 9300 sq. ft will be available at the end of 2019. and is equipped with a loading dock, grade level door, and 1-2 tonne cranes which is an incredibly rare find in this market. Interior photos will be posted shortly.

If you’re an industrial tenant in need of quality space in St. Catharines I would love to hear from you to see if this property or any others might be of interest.

Why do commercial tenant's need insurance if the landlord has it?

Full disclosure here, I’m not an insurance broker.

I’m writing this post because occasionally a new business will ask why they are providing insurance for commercial or industrial lease space if the landlord already has it.

It’s true that a landlord should have insurance to protect their property, but that is exactly what it is limited to, their property. The type of insurance that is usually being requested in a commercial lease is in addition to the landlord’s insurance, often called content and liability insurance.

As you suspect, content insurance is to protect the tenant’s contents in the event they are damaged or destroyed from various potential issues that could arise such as a building fire, a break in, a flood, etc. Seeing as the landlord’s insurance only covers the building this added insurance brings peace of mind to cover the tenant’s equipment and inventory. The liability aspect is protection from unfortunate events such as injuries, deaths, other types of damages, etc. that may occur in the tenant’s place of business. These are very shortened explanations of content and liability insurance so if you’re looking to know more details, it’s best to speak with your commercial insurance provider.

Content and liability insurance should be considered mandatory in a commercial real estate lease (it is in my lease) and if you are a landlord who has not implemented it, make it mandatory for your tenant’s as soon as possible. If you’re a tenant without this insurance, it would be risky to operate without it.

Why don't I own commercial real estate and why does this benefit my clients?

Real estate agents are known to invest in real estate. For obvious reasons it’s familiar territory and if you work in the industry you will come across various commercial and residential real estate investment opportunities, and it’s hard not to consider the really attractive ones.

While it’s good to have the advice of an agent that is also a savvy investor you need to keep in mind they may not represent your interests very well. I have discovered that not owning a local real estate investment allows me to represent my clients better because I’m not competing with them.

Consider a scenario where I may own a commercial plaza or a multi-tenanted industrial building. I’m motivated to keep my buildings full with tenant’s just like any other investor. If I have listings for lease in my own buildings and listings with other landlord investors that have similar properties with vacancies, it would be wise to suspect that I’m most likely trying to push tenant’s into my own buildings before my other listings. Not only am I competing for tenant’s, I’m also competing for investment opportunities too. As a Realtor with my ear to my ground I’m likely to come across investment opportunities before the average person. Be sure to work with an agent that wants to share that opportunity with their clients rather than keep it for their own interests.

Also considering the scenario from the tenant’s perspective, how do you know that you are being shown all properties or the best properties that fit your criteria? It would be wise to suspect that the agent is trying to get you to focus on their own properties. If you find yourself in the position where you are only being shown options owned by the Realtor it might be good to get a second opinion.

To avoid this scenario it would be good to have this discussion with a Realtor you are thinking about working with. If they own commercial or industrial buildings in the area they are your potential competition if you are a landlord and they may not offer you all of your options as a tenant.

To avoid this conflict of interest I have a promise to my clients that I will not own commercial or industrial real estate in the Niagara Region. This way my landlord clients are assured that I am trying to put tenant’s in their buildings and my tenant clients are assured I’m not just showing them properties that I own.

Niagara's Industrial Real Estate Market Heats Up

If you're an industrial tenant on the move in the Niagara Region you have probably noticed by now that there isn't much out there to select from, especially if your business is under 5000 sq. ft. Even for larger tenant's it's still slim picking.

What we are experiencing is simply a supply and demand issue. There are an abundance of tenant's looking but simply not enough property available. In St. Catharines for example, this has caused average base rents to escalate quickly over the last few years from an average around $5 to $6 per sq. ft. towards $7 per sq. ft. in 2018. (keep in mind these rental rates are for quality spaces)

There appears to be no end in sight for the supply and demand issue in the industrial market. While the Niagara Region is expanding and bustling with residential development, there has been very little development in the industrial sector to create more supply and cool the lease rates for available space. With landlord's enjoying low vacancy rates combined with higher rental rates there is a lack of desperation to be flexible and negotiable for new and existing tenant's.

It's important for industrial tenant's to make sure they are working with a knowledgable commercial / industrial realtor for access to the most up to date opportunities, and to ensure they are being competitive enough when they find the building they want to pursue. Submitting a well written competitive offer will increase your chances of success so it's important to make sure you're working with a knowledgable commercial agent for the best approach.