Dear Santa: Our Real Estate Wish List for 2017

Can you believe it's Christmas this weekend already? Wow, the fall really flew by. Hopefully you are staying warm out there as our area has really gotten an unseasonably cold and snowy start to the winter.  Anyways, in honour of everyone’s favourite present-bearing, cookie-eating jolly fellow, we present our real estate wish list for a prosperous 2017.

Continued Economic Growth
2016 was a great year for our local economy.  A strong economy is the backbone of a healthy real estate market.  Things look primed to continue in 2017 and hopefully that rings true.

Continued Migration To The Windsor Area
Without a doubt, the local real estate market has gotten a boost from retirees moving here for the low real estate prices and warmer climate.  We are also seeing a return of people who went out west (Alberta) for jobs and are returning after our local economy is creating jobs again.  More immigrants are also choosing the area as opposed to the large centres (GTA, Calgary) for the same reasons.  Hopefully this trend continues for 2017 and beyond.

More Industrial Inventory
The industrial market started 2016 very tight and only got tighter as the year went along.  Everyone seems to need more space for the contracts they have and they’ll have to start turning away work due to not having the space to produce.  The area seems ripe now for new construction of industrial buildings.  This ties into our next wish…

More Serviced Industrial Land
Continuing the theme of industrial space shortage, the only way to meet the current demand seems to be to build more buildings.  The problem is we don’t have much in the way of serviced industrial land that is “shovel ready”.  This is a complicated problem that involves city zoning, planning, servicing, etc and needs to be discussed.  Companies could start skipping over the area as a potential destination for their plant due to not being able to get the facilities they need.

Local Employers Successfully Filling More Open Positions
Everyday we deal with business owners.  The most common complaint we hear is, “I can’t find or keep staff”.  Across all industries and all sizes, this seems to be a consistent problem.  This, like the previous wish, is a complicated problem. We need to do a better job producing workers as a city and country that matches the needs of employers.  Some of this could be solved by wish number two, but not entirely.  This isn’t a problem specific to this area but seems to be striking in an area that went through a long period of high unemployment.  The future of our economy depends on this getting figured out.

Well, that does it for our posts for the year.  Hopefully you’ve been good! What’s on your wish list for Santa?

2016 Local Real Estate Stats Examined

Last week we made a few general observations about our local real estate market from 2016.  This week we are going to dive a little deeper and look into some relevant statistics.  Note: Some of these statistics are based on the first 11 months of the year, as we still have a couple weeks left in December.  Also, these stats refer to our home market of Windsor, Ontario.

Units Sold Increased 10% Year Over Year

The headline is pretty self explanatory.  The number of units (houses) sold are on pace to top last year by 10%.  This is generally positive as more transactions are taking place so the market is more active.  Obviously this is a great thing for sellers.

Listings Increased 2% Year Over Year

Again a pretty straightforward headline.  The number of houses listed for sale are on track to increase by 2% compared to last year.  All other things being equal, this is positive for buyers as there is more inventory for sale and negative for sellers as there is more competition when selling your home.  When comparing the increase in listings with the increase in sales, sales have increased significantly more than listings, so one should expect to see an increase in prices during this period.

Average Sales Price Increased 13% Year Over Year

Good news for sellers!  Average Prices increased from $200,823 to $226,193.  After seeing sales up 10% and listings up only 2%, there was not enough supply to meet demand and there was upward pressure on prices.  Some of this gain can also be attributed to a higher share of high priced homes being sold this year compared to last year.  Obviously this is not so good for first time home buyers, or people who have been renting for the last year as it will be more expensive for them to find a home.

Housing Starts Increased 30% Year Over Year

This is great news all around.  Sales of new construction houses have really boomed this year.  This is also great for the local economy as the builders hire skilled trades which boosts local employment, the city or town expands its tax base, and additional services must be added (retail) to service this additional density and demography.  Hopefully this continues.

The Rental Vacancy Rate Decreased from 3.9% to 2.9% Year Over Year

This is another overwhelmingly positive statistic.  On a percentage basis this means there are 25.6% less vacant apartments in the area.  This continues the improving trend from 2009 when vacancy rates were 12%+.  Vacancy rate declines are generally indicative of economic growth and population growth (both province migration ie Alberta to Ontario, and immigration).  With an improving economy, robust sales activity and a tight rental market, it is clear people are moving to the area.  The area now seems ripe for new construction of rental units.

So after reviewing the stats it's clear to see that 2016 was a pretty healthy year for the real estate market.  Those are our takeaways from the stats.  What are yours?

*Sources WECAR & CMHC

2016 Year End Real Estate & Related Observations

 As the holidays draw closer we are going to do a few posts wrapping up the year.  And what a year it has been for our real estate market and many other markets in Canada and the US.  Today we are going to discuss some observations we’ve made throughout the year.

The Year of Multiple Offers

Multiple offers seemed to be a way of life this year.  Bidding wars were everywhere, in all parts of town and all price ranges.  This even spread to the commercial market as some retail, multifamily, and industrial buildings had multiple offers.

New Construction Is Back In A Big Way

New construction was a bit of a tough business since the recession of 2008 in our market.  That changed in a big way as sales of new construction boomed all over the area.  Clearly there was some pent up demand from the last several years and that translated into huge numbers.

The Local Economy Is Finally A Tailwind

We deal with lots of business owners, and so many of them talk about having way more business than they can handle.  This applies across all industries.  The local unemployment rate has plummeted from being one of the worst in Canada to below average.  This bodes well for a continued buoyant, local real estate market.

We Need to Build More Condos

There are not enough condos out there to meet demand.  With an aging demographic, mixed with the  acceptance of condo living by Millennials, the once stagnant demand for condos locally is long gone.  We expect to see more new condos being constructed in the next few years with brisk demand to meet them.

Downtown Is Still A Sore Spot

The downtown hasn’t really been able ride the coattails of the improvements in the local economy and real estate market as much as it was hoped for.  We still need more people living down there to change the demographics to support more retail and attractions that people like to speak about.  Hopefully the University opening in the near future will be a catalyst, but time will tell.

Those are some of our observations from 2016.  What were yours?

Real Estate & Related Terms Explained: First Right of Refusal

As  we wrap up this series on leasing terms for the year, another confusing term/subject is on deck.  Although the definition is pretty literal, the application of it in the commercial leasing world isn’t so straightforward.

What Exactly Is A First Right of Refusal (FROR)?

A right of first refusal is a contractual right of an entity to be given the opportunity to enter into a business transaction with a person or company before anyone else can. If the entity with the first right of refusal declines to enter into a transaction, the owner of the asset is free to open the bidding up to other interested parties.  In the real estate world, this business transaction refers to the real estate premises in subject, be it commercial space, land, etc.

When Would A First Right of Refusal Apply?

The most common time when you see a first right of refusal applicable would be when a tenant is leasing a space, the landlord decides to sell, and the tenant has a first right of refusal to purchase the property.  Another common application would be when a tenant in a building is growing and as a neighbouring space becomes vacant, the tenant would have a first right of refusal to lease the additional space before the landlord can lease it to another tenant.

What Else Should I Know About A First Right of Refusal?

A first right of refusal is a term of a lease agreement that should be negotiated along with other terms at time of lease negotiations.  It usually states a date that relates to the first right and the mechanism for administering it.  The more thoroughly stated the better, so there are no disagreements later.  

To use an example: if a tenant has a first right of refusal on the building they occupy that states that should the landlord get a bonafide offer to purchase from a third party, the tenant will have seven days to match the terms of that offer.

The actual clause in the lease agreement will be more detailed but that covers the basis of it.

Obviously, a first right of refusal is a benefit to a tenant if they desire to own the building they are in someday.  It is a nice perk.  It is also a benefit to have a first right on neighbouring space, as being able to expand without moving is attractive.

On the landlord’s side, it is sometimes a detriment to have a first right of refusal when selling their building.  If a third party buyer knows that the tenant has a first right of refusal to match their offer, they might decide to not bother.  It really depends on the situation though.

As always, make sure to hire an experienced commercial realtor to negotiate terms in your lease, including first right of refusals!  Once again, this wraps up our series on explaining leasing terms for the year.  Hope it was informative.  If you ever have questions don’t hesitate to drop us a line.

Real Estate & Related Terms Explained: Personal Guarantee

Let’s say you are an aspiring entrepreneur and you have an idea for a small business. You work on your business plan, get approved for some financing at the bank and as everything looks promising, you are ready to start looking for commercial space. After your commercial realtor finds you the perfect space, you negotiate a deal with agreeable terms but one issue has come up that you didn’t foresee – a personal guarantee.  Today we are going to discuss personal guarantees.

What is a Personal Guarantee/Indemnity?

A personal guarantee (also often referred to as an indemnity), is really exactly what it sounds like – an unsecured written promise from an individual to repay any obligations of a business. So in the above case, should your business not go as planned and you decide to close down, you will be personally liable for the lease obligation remaining. When we say the guarantee is unsecured, we mean that your guarantee is not tied to a specific asset (ie your home) but in the event of default the landlord could go after any of your assets to settle the debts.

Why Would a Landlord Want a Personal Guarantee?

A personal guarantee is essentially an extra level of security for the Landlord. These are especially prevalent and common when doing leases with small businesses. Small businesses generally have less in the way of assets and therefore the financial health and creditworthiness is tied to the owner’s personal finances.

Take the example of a new startup business with zero in assets and the landlord who is agreeing to renovate the space on the behalf of the tenant for their needs. There is high risk of failure in this situation, and as such it is prudent for the landlord to request a personal guarantee. It should also be noted that in the above example, when the tenant was approved for financing from the bank, this would’ve come with personal guarantees at the bank without a doubt!

Once a business is established with assets and a history of profits, the needs for a personal guarantee is lessened. At that point, a landlord and likely the lender as well will look to the financial health and creditworthiness of the corporation. A personal guarantee is also less necessary in certain other situations, like when a tenant is renovating their own space or if the term is short enough to not have it worthwhile.

What Else Should I Know About Personal Guarantees?

The issue of personal guarantees is a term that should be discussed as part of an offer to lease. That way there are no surprises when the lease draft comes out. A personal guarantee can also be offered by a third party. Take the example of a young professional with limited assets or credit history and their parent agreeing to personally guarantee their lease. Lastly, a personal guarantee can be negotiated for a period of time (ie say you signed a 10 year lease, but only agreed to a personal guarantee for the first 5 years).

Make sure if a personal guarantee is applicable to your lease deal that your commercial realtor negotiates the terms on your behalf. And also make sure your lawyer signs off on the clause or related indemnity agreement in your lease. In the (hopefully unlikely) event that it becomes an issue, you’ll be glad you did.

Real Estate & Related Terms Explained: Sublet

You may have heard the term sublet or sublease before, as in “my friend is subletting their space”.  But do you know what that means?  This is an important topic as a Tenant or Landlord in commercial leasing and one that is rarely understood properly, until the situation arises…

What Exactly Is a Sublet?

A sublet occurs when a Tenant no longer needs their space or it no longer suits their needs, but still is responsible for the remainder of the term of the lease they signed. So, instead of letting the space sit dark while continuing to pay, they sublet the space to another Tenant. When some sort of arrangement is agreed to, a sublease agreement is signed by both parties.

How Does a Sublet Work?

After a sublease is signed, the sub-tenant starts to pay rent to the sub-landlord. The Tenant in turn continues to pay rent to the Landlord. Even though the sub-tenant is now occupying the space, the original Tenant is responsible for all the terms under the original lease.

What Else Should I Know About Subletting?

If a Tenant wants to sublet their space, they require a Landlord’s written approval. Landlord’s are not allowed to unreasonably refuse a request for a sublet. Usually your lease agreement will speak to the ability to sublet and any mechanisms that apply. Should you have any issues with subletting, contact your lawyer.

From a sub-tenant perspective, sometimes subleasing space comes with risk, as it doesn’t come with any renewal options. This can put you in a bind when your term runs out. Therefore, when we have strong Tenants considering a sublet space, often times the deal goes back to the Landlord for them to deal with directly (instead of on a sublet basis) on the space so that proper terms can be negotiated for the tenant and then a termination is negotiated between the Landlord and the existing Tenant.

With careful thought and planning, sublets can be pulled off without a hitch. Make sure to hire an experienced commercial realtor to guide you through the process towards a smooth transaction.

Real Estate & Related Terms Explained: Renewal Option

Say you are a commercial tenant in a plaza and business is pretty good. You are established now and planning for the future. Before you know it, a few years have gone by and you realize that your lease must be coming up for renewal later this year. But do you really understand what a renewal option is and what rights and obligations you have? Today we are going to discuss the important topic of renewal options.  

What Exactly Is A Renewal Option?

A renewal option is a clause within your lease that outlines the terms for renewing or extending a lease agreement. Obviously this renewal option comes into play as you approach the end of your lease term.  These renewal options are at the right of the tenant and not an obligation.

How Do Renewal Options Work?

Renewal options generally spell out how (usually in writing to the Landlord), and when (usually a time period before the expiration of the lease, ie 6 months), this option can be exercised. There is also usually a number of renewal options (ie. 3 options of renewal), and a lease term (ie. 5 years), tied to a renewal option. This also assumes the Tenant is in good standing not in default of any of the covenants of the lease. The wording of your renewal option will be a clause included in your lease agreement.  Make sure to have your lawyer read over the clause to protect your interests.

What Else Should I Know About Renewal Options?

Sometimes renewals also spell out the rental rate. The rest of the time the rate in the renewal is at “a rate to be negotiated”. This rate to be negotiated is supposed to be at a market rate at the time of the renewal. In Ontario (our market where we practice real estate), in the case where a Landlord and Tenant can’t come to terms on a rate, there is an arbitration process to resolve the matter.

In the event a Tenant doesn’t exercise their right to renew, they end up holding over month to month and lose all additional renewal options. If you’d like to read up on this situation, be sure to read our blog on this topic here.

Renewal options are a negotiating term when negotiating a commercial lease. Make sure you get a good commercial realtor to negotiate your renewal options on your behalf and be sure to understand this renewal option for the future.