WHY GREATER SUPPLY THAN DEMAND IN OFFICE SPACE ISN’T LOWERING RENTS

Office vacancy rates in parts of the Greater Toronto Area (GTA) are approaching levels not seen in twenty years, with supply easily outstripping demand. Economics, and common sense, would tell you that this means prices should drop – however, this is not necessarily the case.

The reason rent prices are not falling is due to how the GTA office market is controlled. The market is characterized by an oligopoly, dominated by a small number of sellers. With so few sellers, awareness of the actions of one another is highly likely and therefore the decisions of one impact and are influenced by the decisions of others. In an oligopoly, the close-knit nature of competitors can lead to reduced competition and higher costs for consumers.

Twenty years ago, this wasn’t the case. Office buildings in the GTA were owned by a variety of landlords and many buildings / portfolios were privately held by family owned real estate firms. Large institutions, such as pension funds and insurance companies, had some ownership but played a smaller role in the overall market. Over the years, this situation has reversed itself, leaving only a handful of privately held real estate owners and a market full of institutional owners. Moreover, the proliferation of the Real Estate Investment Trust (REIT) market has resulted in many of the new commercial developments falling under the control of REITs, narrowing the ownership field further.

WHY SHOULD A TENANT CARE WHO OWNS THEIR BUILDING

In a market controlled by few sellers, even during times of abundant supply, competition is limited and net rents will be similar across the market. Even in buildings with significant vacancy (> 15%), landlords will not be inclined to materially reduce the net rent in order to secure a new tenant.

When institutional landlords decide to get ‘aggressive’ about securing tenants, they are more likely to offer inducements – improvement allowances, free rent, cash / moving allowances – than to negotiate the rent.

HOW CAN TENANTS WIN IN THIS NEW MARKET

The best way to ensure your interests are looked after as a tenant is to secure the services of real estate professional who understands the new dynamics of the market and can negotiate favourably on your behalf.

At M Commercial, we don’t use the typical sales approach employed by most agencies where the transaction is expedited with little regard to what is in the tenant’s best interest. Instead, we take a consultive approach, slowing down the process to understand what type of real estate works best for the tenant’s business. Our approach is designed to educate tenants on how real estate can help their business grow and succeed, and which landlord provides the best fit for their particular needs.

The office leasing market in the GTA has changed; this can be an aggravation for those who stick to the old ways of doing business, or an opportunity for those who change with it.

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