What do you think of this project?

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David A said:
Cap rate? They do know that the rate of return on empty space is less than zero, don't they?
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That's not how it works exactly. Zero is better from an overall standpoint than having a significant discounted tenant with a long term lease.
 
Oilers99 said:
That's not how it works exactly. Zero is better from an overall standpoint than having a significant discounted tenant with a long term lease.
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Actually, I didn't write zero, I wrote less than zero and I even bolded it, so hopefully the message would get across. Lets see "how it works" - the landlord still has to pay all the building costs related to the empty space. So, to clarify it is a negative return (ie. zero revenue less costs). Empty space still has to be heated, lenders still want interest, whether the space is occupied or not, there are security costs, etc ....

Now perhaps some those pension funds don't pay that close attention to how their properties are managed, or those in Edmonton are not as evident to them as in other places where commercial rental has been much more robust over the last decade or so.

It seems to me some spaces here have sat empty 3 to 5 years or longer, so all those carrying costs have to add up. At some point expecting a mythical tenant to come in and pay premium rates in a tough market is really faint hope so it is unlikely you will come out ahead after being in the hole for several years. I think that's how it works.
 
David A said:
Actually, I didn't write zero, I wrote less than zero and I even bolded it, so hopefully the message would get across. Lets see "how it works" - the landlord still has to pay all the building costs related to the empty space. So, to clarify it is a negative return (ie. zero revenue less costs). Empty space still has to be heated, lenders still want interest, whether the space is occupied or not, there are security costs, etc ....

Now perhaps some those pension funds don't pay that close attention to how their properties are managed, or those in Edmonton are not as evident to them as in other places where commercial rental has been much more robust over the last decade or so.

It seems to me some spaces here have sat empty 3 to 5 years or longer, so all those carrying costs have to add up. At some point expecting a mythical tenant to come in and pay premium rates in a tough market is really faint hope so it is unlikely you will come out ahead after being in the hole for several years. I think that's how it works.
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I am aware it is a negative return, but not all the owners of CRUs are institutional funds from Toronto. The majority of owners have determined that having these properties vacant is better than at a discounted rate. Not sure what to tell you but that's how it works.
 
It is a free country, so they are free to made poor decisions. Perhaps they have plenty of money, so it may be easy to sit on empty space, rather than adjust their rates, which is what the market it actually trying to tell you when there is a lot vacancy.

I get that is a choice some landlords make, but what irks me is trying to portray it as a smart choice.
 
I assure you, the majority of the owners of these properties with empty CRUs, whether it makes inherent sense to you or not, have crunched the numbers and the option to leave vacant space until premium lessees take the space is the most financially prudent.

These decisions aren’t just made out of arrogance or laziness—just the unfortunate reality of the economic forces at play. Doesn’t mean it doesn’t suck for the rest of us.
 
I respectfully disagree, but feel free to crunch the numbers and prove your point if you want.
 
David A said:
Actually, I didn't write zero, I wrote less than zero and I even bolded it, so hopefully the message would get across. Lets see "how it works" - the landlord still has to pay all the building costs related to the empty space. So, to clarify it is a negative return (ie. zero revenue less costs). Empty space still has to be heated, lenders still want interest, whether the space is occupied or not, there are security costs, etc ....

Now perhaps some those pension funds don't pay that close attention to how their properties are managed, or those in Edmonton are not as evident to them as in other places where commercial rental has been much more robust over the last decade or so.

It seems to me some spaces here have sat empty 3 to 5 years or longer, so all those carrying costs have to add up. At some point expecting a mythical tenant to come in and pay premium rates in a tough market is really faint hope so it is unlikely you will come out ahead after being in the hole for several years. I think that's how it works.
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The value of a property is based on the rent. If an area is a 5 cap, then the value of the property is roughly 240x monthly NNN rent.

So if they give you a $250 per month rent discount, then the value of their property just fell $60k.

The landlord's bank may even call the loan if the value falls below their mortgage or if the cap rate falls too low.

It is stupid, but how commercial real estate market works. Its one of many reasons why you’ll see commercial stuff sit.

Developers can sometimes offer "free" rent at the first year of say a five year term, but then require you to pay the elevated price the rest of the time. Another thing a developer can do is give you a cheaper rate, but force you to sign an NDA that says you can't disclose their rental rate to anyone else to protect the higher rate and the overall building value. They'll never advertise lower rental rates though because it is correlated to the value of the property.
 
Actually (to stay off topic) we engage in rent proposals for our clients all the time. For rental spaces we typically ask for 3 months free rent (Retail) and 6 months (Restaurant), the latter divided into 3 months in advance of a lease effectuation date (to complete plans and permitting) and 3 months of actual free rent after the lease effectuation date. Then we look at the "ask" for rent and -- as an example -- if it is $30.00/sq.ft.we take that as the median rate and graduate it so that the new tenant has an easier time at the critical start-up point in time -- so on a 5-year lease (Retail) we would look to pay $20.00/sq.ft. the first year, $25.00/sq.ft. the second year, $30.00 the third, $35.00 the 4th and $40.00 the fifth. We would typically ask for an inflation clause for lease periods beyond 5 years (lease option period). For restaurants we typically ask for a ten year lease with the same kind of graduated rent and free rental period. We also ask for a tenant improvement allowance -- this is where the landlord has flexibility because it does not affect rental income. The TI allowance can be "charged off" against building costs which landlords typically have a reserve fund to accommodate.
 

Growing pains of a changing city: End looms for businesses uprooted by redevelopment​

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Ralph’s Handi Mart has served as Strathearn’s closest option for groceries and goods. Developers say the new project will include a grocery store. (Clare Bonnyman/CBC
 
Kinda tired of the sob stories. Tenants were all on month-to-month leases, as annoying as it is not knowing when this will happen for many years, they always knew they were in a position where it will happen eventually. If they wanted security, would have looked for a long-term lease elsewhere long ago.
 
I can relate. I was renting office space on a month to month basis, as that was all the landlord would offer. It was a good deal, a good location and it lasted for almost 10 years, but then the building was sold and it quickly ended. It was quite a scramble then.

However, it is not just that the tenants are having to quickly deal with it, I think perhaps the bigger issue is the neighbourhood will lose a lot of amenities for at least several years. The landlord could have handled this better.
 
Three thoughts about how to handle this better:

- Give the tenants more notice
- Provide an opportunity for existing tenants to get space in the new development similar to their existing lease and
- Develop new retail space in a different area from existing retail space, so as to minimize the time the community has no retail space.
 
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