2017 Real Estate Trends: Sky High Hydro Costs In Ontario

Have you looked at your hydro bill lately?  Did you have sticker shock?  This is a topic that everyone is talking about in Ontario and it doesn’t look like relief will be coming anytime soon.  Naturally, the effects of this rising expense are felt throughout the economy, including the real estate sector.  Today we are going to look at some of the ramifications from a real estate perspective.

Reduced Disposable Income

All things being equal, this increase in utility costs equates to a lower disposable income for workers in the local economy.  This will affect retail sales, which will lower economic growth.  Potential home buyer’s budgets will be more stretched and therefore will lower the amount of money they have available to service mortgage debt, either reducing the value of homes they can afford or completely taking some buyers out of the market.  Therefore, demand will suffer.

More Efficient Homes Becoming Important

The stakes are high in Ontario these days when it comes to energy efficiency.  It is more important and economical to live in an efficient space than ever.  Some of the large, older homes have inherent difficulties in energy efficiency and the costs for utilities in these homes are becoming prohibitive.  Because of this we see a shift to more demand for newer constructed homes that are more energy efficient.  We also see a shift to people building smaller and smartly designed homes to be able to fit in everything they want in less sq ft.  Homeowners with 3,000-4000’+ homes are routinely getting $1000+ utilities bills. With utility rates projected to increase significantly from here, demand for operating these homes could slow as a result.

Renewable Energy Becomes More Economical, Technology Becomes Important

As prices of hydro continue to rise, the economics of the payback on renewable energy get more attractive.  Things like solar energy will look more attractive on a micro basis for consumers.  Technology like smart thermostats and appliances will also be important to conserve energy for the consumer.  Do your research!  As these alternatives become more widely adapted they should also come down in cost.

Increasing Costs to Businesses

As a large input cost to many businesses, hydro is getting to a tipping point in Ontario.  These could affect the future of many businesses in our Province and could lead them to turning to lower cost jurisdictions.  One would also assume the consumer will see prices increase as businesses pass on the additional costs.  This would result in an inflationary period where the consumer consistently get sticker shock.  Time will tell how this all plays out but its safe to say it won’t be positive for the real estate market!

Those are some of the effects we are seeing from rising hydro costs.  What are you seeing?

Real Estate & Related Terms Explained: Gross Lease

 As we continue on in our series of explaining real estate related terms, the streak of leasing-related topics continues. Over the last few weeks we have discussed triple net leasing and some related terms. Today we are going to touch on the opposite end of the spectrum when it comes to leasing… gross leasing.

What Is A Gross Lease?

A gross lease is a type of lease where the Landlord pays for the building’s operating costs, including the property taxes, insurance, maintenance, etc. From the Tenant’s perspective this equates to a flat fee or monthly rent in exchange for using the space. This is the opposite of how a triple net lease is administered, where the Tenant pays their proportionate share of the building’s operating cost.

How Is A Gross Lease Administered?

A gross lease is either administered as $/ft figure (ie $10.00/ft), or as a flat dollar amount per month ($2000/Month). Obviously from a Tenant’s perspective, a gross lease is simpler as the cost every month is fixed. Naturally, some Tenants prefer this type of lease arrangement, compared to triple net leasing.

What Else Should I Know About Gross Leasing?

Gross leases can sometimes include utilities cost and sometimes they are separately metered. It is important to understand how utilities are charged in the gross lease deals you are looking at. As a Tenant in a gross lease building, even though you aren’t paying additional rent to cover your share of operating costs, you will want to also ensure that the maintenance of the property has been kept up (landscaping, snow removal, etc). This can be done with language speaking to this in your lease agreement.

Sometimes you will run across a building that is run somewhere between a net and gross lease arrangement. These can be referred to as semi-net or semi-gross leases with an adjustment for part of the operating cost (ie. property taxes or utilities). The Landlord will set up a gross lease, but charge you back for your share of utilities or property taxes. Your lease agreement should speak to any special arrangements like this.

On the Landlord side generally lenders and other investors won’t view investment properties with gross leases as favourably. As opposed to net leasing where the Landlord is collecting a net rent yearly, with gross leases the Landlord is responsible for the expenses. This can lead to variability in the net income of the property and therefore leads to a lower applicable cap rate (valuation) when selling or financing the property.

Now you know the difference between a gross and a net lease. If any of these concepts are still confusing for you, feel free to drop us a line. We are here to help!