Slow but steady road towards sales proceeds

Adjustments aren’t speedy

Let me explain.

Typically, at the beginning of the calendar year, a property manager or owner will estimate the occupancy costs tenants must pay for their proportionate share of the property.

This estimate is based on the previous year’s expenses.  One example is that the property taxes for the upcoming year are not yet finalized when that estimate is prepared.

Let’s assume a sale takes place on June 31st. The property manager or lawyer must wait until all invoices for Jan 1st to June 31st have been received.

Expense items, such as utility charges, yard maintenance, repairs, etc., can vary monthly and are therefore impossible to project with certainty.

Once all invoices have been collected, an adjustment is made in favor of either the buyer or seller for the subject period.

At year-end, the buyer must total the invoices, compare the occupancy cost estimates to actual numbers, and reconcile with each tenant.

Super long snags

We recently experienced another issue that complicated matters even more.

A multi-tenant retail property had been recently subdivided.

The seller was also the business owner that occupied a freestanding building at the end of the parcel of land.

They completed the subdivision of the freestanding building and sold the remaining multi-tenant tenant building to an investor.

Even though two new titles had been raised and the sale was able to complete, the city had not yet completed the re-assessment.

It now appears that the assessment will be finalized about six months after the sale closed.

While it is possible to make an educated guess of how the taxes might be adjusted afterward, there is no way of knowing with certainty.

That final statement will have to wait until the Assessor’s Department has completed its process.

A lot of headaches can be avoided if all parties to the transaction are well informed of the process ahead of closing.

Debunking CRE Real Estate Myths

Myths are described as either traditional stories of phenomenon or more commonly a widely held but false belief or idea.

Myth #1 – My buddy paid (insert silly value) right down the street for the same thing.

Not all commercial real estate sites are created equal.

Zoning can vary even on the same block as your buddy.

This will affect the allowable uses which then affects the allowable tenants or buyers.

The more flexibility a site offers, the more attractive it can be.

Also, land relative to building structures plays a role in value.

The percentage of land required versus the building is tied to use.

Land shy properties become harder to accommodate business and therefore could be de-valued.

There are many reasons why some sites might be worth more or less than their neighbour so you can’t judge value by address alone.

Myth #2 – I’ve got plenty of time to get a lease in place.

Whatever timeframe you’ve set aside for your search and lease negotiation, double it.

Searching, viewing, securing and moving into a property can take a lot longer than you realize.

Decision making timelines are well within your control but be prepared to wait on the other side.

Landlords are eager to lease vacancy, however, they often have other businesses and believe it or not, personal lives.

They can be unavailable to make snap decisions or expedient in responding to offers.

The best way to bust this myth is to find out from the listing agent what kind of response time the Landlord requires.

You may also need to engage third parties for part of the transaction and sometimes cannot speed up the wheels of bureaucracy.

Keeping on top of the professionals you’re using for reports or financing does often keep things rolling more smoothly than not.

Patience is a virtue, as they say.

Myth #3 – This building can be repurposed for the next person.

This myth comes with a caveat.

While developers are mindful of building new structures that be used for the most purposes, commercial assets can have a shelf life though.

It’s not uncommon that tenants or owners find themselves unable to reuse previous tenant improvements.

So long as that  can be torn out, though, the space can get a new lease on life.

Buildings that have been constructed with a specific use are the most obvious types in this category.

A cost analysis could reveal that retrofitting a building may not be feasible.

The same can be said of older functionally obsolete properties with dimensions that are simply no longer desirable to tenants.

Demolition and redevelopment of the site can be the logical step to recover the highest rents and most functional uses going forward.

One of many benefits to setting up shop in SK

Altus Group has recently released its 2022 “Canadian Property Tax Rate Benchmark Report,” which provides some interesting stats.

Although Saskatoon and Regina both raised commercial tax rates, with Saskatoon increasing by 3.3% to $16.15 and Regina by 2.74% to $17.14, Saskatchewan’s costs are far below the national average.

Tax rates in the chart below represent the taxes paid per $1,000 of assessment:

 Credit: Altus Group Canadian Property Tax Rate Benchmark Report

Saskatoon and Regina are 50 percent and 41 percent below the national average.

Vancouver boasts the lowest ratio in the country. As you might guess, their assessed values are considerably higher than our prairie cities.

However, many other larger centers have those higher assessed values and still calculate rates much higher than ours.

How do commercial and residential average rates compare

I noted above that the average 2022 estimated commercial property tax per $1,000 assessment is $24.23.

Looking at those same eleven Canadian cities, that equivalent average number for residential is $9.11.

Regina and Saskatoon are above the residential average at $10.02 and $11.38, respectively. Once again, Vancouver is at the bottom at $2.69.

We are fortunate to reside in a jurisdiction that maintains the country’s lowest commercial property taxes. It’s just one more of the many reasons for establishing a business in this province.

For commercial property owners, it’s always beneficial to monitor and note any significant change in your tax assessment.

If it appears as if the assessment you’ve been handed is unfair, don’t hesitate to engage a property tax professional.

They will be able to advise you if the time spent on an appeal is worthwhile.

Value misjudgments happen, and the savings you realize if an appeal is successful could be substantial.

Where do Saskatoon industrial lease rates go from here?

Oil and gas prices will continue to drive economic growth in SK and AB through 2024, according to the Conference Board. Saskatchewan will also benefit from higher prices for commodities such as wheat and potash.

Saskatchewan is reported to lead our country in 2022 with a growth of 7.6 per cent.

However, we’re experiencing inflation at a rate we’ve not seen in the past 15 years.

The cost of construction and land has been rising.

There is a shortage of labour which is putting pressure on construction wages.

The logical conclusion is that the cost to lease industrial real estate will likely break through to a new high in the months ahead.

Whereas the current average rental rate according to our 2Q22 Industrial Market Survey is $11.82 PSF, we know that a developer needs to see a $13.50 PSF net effective rate on shell space to justify building new warehouse today.

Let’s look back in time

There was a 20-year period before 2005 in which warehouse rental rates flatlined.

I know of one example where a Saskatoon industrial tenant renewed their lease for four five-year periods at $4.50 PSF net.

They may have been a bit on the high and sometimes on the low side, but their rate did not move over 20 years.

The fact our net effective industrial rates have been bouncing around in the same territory for almost ten years is fascinating.

Between 2007 and 2012, the average rate jumped from $5.62 PSF to $11.21 PSF.

That’s very close to a 100 per cent increase in seven years. Could it happen again?

If you put seven different economists in a room and asked that question, you will get seven different answers.

Economies of scale matter

When quoting average rates, it’s important to mention that there can be a considerable difference in price between 2,000 SF and 200,000 SF.

There are significant economies of scale in construction costs that must be factored in.

Amount of spec building will influence the future

If you came to me today and wanted to lease a new warehouse, it would take one full year to complete the project due to labour and supply chain issues.

ICR’s 2Q22 market analysis reports an average vacancy of 2.52 per cent.

It worsens if you isolate that statistic to the Marquis area (our main industrial area in Saskatoon), where the current vacancy is just 1.83 per cent.

If we do not see more spec building, the resulting supply/demand factor will affect those rates in a way we’ve not seen for over ten years.

It’s going to be very interesting to see where the line on this graph moves to in the next five years!

Carrying the Mission, Vision & Values through corporate leadership

I firmly believe that the most crucial job a leadership team has is to design and implement strategies to see the organization grow and flourish in the long term.

About four years ago, we completed the soft rebrand of ICR.

We didn’t set out to significantly alter our corporate image and logo, but we knew we needed a refresh.

It took time to engage the stakeholders within four different departments to develop our Mission, Vision, and Values statements that represented us all equally.

How does leadership facilitate that discussion about why we do what we do? We struggled with this question, but eventually, we were able to develop an idea and implement it.

Earlier this year, I discussed this solution in my “Conversations over Coffee” with Jana Dutton.

We decided to order pizza or subs and facilitate staff luncheons in small groups to discuss our “why.”  We attempt to include a few individuals from each department at each luncheon to provide a diversified discussion.

It’s been great working with Anna Kalyta, Craig Kuse, Danielle Webster, and the entire staff on this project.

We take each element of our Mission, Vision, and Value statements and share company stories around them, inviting everyone to participate in the discussion.

We then go through a simple exercise that allows each individual to identify their top three personal values.  We believe it’s essential to determine how closely the personal values align with the company values.

When my values are reflected in my work, I’m in flow. I love what I do when I feel I’m contributing to my client’s goals and fulfilling my values.

Plenty of research shows we are significantly more engaged and in flow when our values and our company values align. We are exponentially more productive and enthused about our work.

The luncheons have been fruitful.  We hope to continue these sessions as part of the onboarding process for new employees.  We’re considering other creative ways that we can continue the discussion as the company continues to grow.

Here’s a synopsis of what’s important to us:

VISION: Why do we exist as an organization?

We exist to propel our clients towards prosperity.

I can get excited about a purpose that sees you profit, thrive, and grow. What is your primary purpose in life? How can I be a part of your success in getting there? I can think of an excellent client whom I asked that question several years ago. He has far exceeded that goal, and I have been a part of that journey. It’s a rewarding feeling!

MISSION: What do we do as an organization?

We secure exceedingly smart real estate solutions for our clients.

The reason we win business is that we brainstorm the solutions collectively. They are we, not I solutions.

VALUES: How do we do what we do as an organization?

We offer every client, tenant, partner and colleague the ICR handshake, our unique five-fold approach to growing trust as we do business.

The five fingers on the hand that offers to ‘shake on it’ represents our deeply held beliefs that underpin everything we do – Territory, Results, Unity, Solutions, and Trustworthiness. It spells out TRUST.

The traditional handshake remains one of the most powerful symbols. Those three words – shake on it – resonate with meaning, whether it’s two small boys in the playground coming to a mutual agreement after arguing about marbles or two world leaders desperately trying to avert a war.

The handshake most likely came into being in the Middle Ages when knights would extend an open hand to each other, demonstrating that they were not carrying a weapon. They were coming in peace and crucially, they would honor that peace. Shaking hands is an affirmation of something honorable, a statement of intent. Handshakes are dignified. A handshake says, “I give you my word.”

TERRITORY: (I love this…) We believe in the sacredness of space.

We know that every individual, company, and organization needs its own territory – a place where it can dream, create, produce and give expression to all that it is and longs to be.

We help others to find, manage and flourish in their territory. Simply put…we’re in the business of giving clients their space.

RESULTS: We constantly look for ways to accelerate the success of the people we work with – whether that’s our clients, tenants or colleagues.

UNITY: Unity is not conformity. It is agreement on the important things.

At ICR, we strive toward that kind of unity. That is why we lend the experience of senior staff to Property management and Sales and leasing while at the same time instilling in each individual a sense of ownership of their job.

Unity is required for collaboration, and collaboration, can, at times, be difficult.

SOLUTIONS: We’re a highly experienced commercial real estate company with unsurpassed knowledge that allows us to offer smart and perfect solutions.

Our experience and ear-to-the-ground knowledge shows – and counts.

TRUSTWORTHINESS: From that first phone-in to the final deal, from that initial meeting to our ongoing property management partnership, transparency and commitment overarch every touch-point.

This Globe and Mail graph demonstrates that “High Trust Companies” consistently outperform nearly three times better than the general market:

In the research that I have done, there is overwhelming evidence to show that Organizational Health is the most significant factor determining an organization’s success.

As we continue to evolve, we will see this company flourish and have fun doing it!