Commercial Real Estate: Is Renting The Best Option?

No matter where you live or what you do for a living, the cost of rent will always be one of the biggest elements in any budget. This is true for residential and commercial renters alike, and the high prices only pose more of a challenge in Canada’s largest and most dynamic cities.

Indeed, a recent study by the Canada Mortgage and Housing Corporation showed that almost half of Torontonians face “affordability challenges,” paying more than 30% of their income on residential rent. In Ontario, a full 20% of residents pay more than 50% of their income on rent. The same affordability concerns exist in the commercial property market as well.

While rental prices will always vary based on several factors (location being the most important), many business owners eventually find themselves faced with some common questions. They ask themselves, “Why is commercial real estate so expensive?” and “Should we continue to pay commercial rent as tenants, or should we buy the building instead?

For answers, you need to break down the pros and cons of the issue.

Major Upfront Costs

First, it’s important to understand that a commercial property is not the same as a residential property. Not only do they serve different purposes and have different requirements, but commercial properties are also much more complex and expensive to build in the first place.

After all, there are sprinkler systems to install, extensive HVAC systems to incorporate into the design, higher plumbing and electrical costs, public areas for parking to construct and maintain, cleaning crews to hire, not to mention the sheer size of the property itself. 

The average Canadian home is already large at just under 1,800 square feet (the third-largest average size behind Australia and the United States), so when you consider that some commercial properties can be 10,000 square feet or more, it isn’t hard to understand why the costs of acquisition can run into the millions, or even the tens of millions.

Unless your business is firmly established and has an impressive track record of success, raising the money yourself (or getting a loan from a bank) could pose significant challenges.

In this context at least, renting commercial properties for your business makes much more sense in the short and medium-term.

Supply and Demand

Another factor to consider is the local real estate market.

Because location plays a large part in setting prices for both commercial and residential properties, your decision to buy or rent commercial properties will depend largely on where you are, as well as the rental vacancy rate. The more populous the city and the lower the vacancy rate, the more likely it is for there to be higher rental prices for commercial properties.

Rental rates for commercial property in downtown Toronto or Vancouver will likely remain very expensive now and into the future, whereas in cities like Montreal and Ottawa may show some big advantages to renters. A recent report from Statista.ca shows that the vacancy rate for office units in Ottawa at 6.5%, roughly triple the amount of available space you would find in Toronto or Vancouver, whose vacancy rate stands at 2.3%.

This is another advantage for renters, and a large part of why the cost of renting Ottawa commercial real estate is a more affordable option than elsewhere.

Time is Money

When trying to decide whether renting or buying commercial properties makes the most sense, a factor that is often underrepresented in the calculus is the time and effort it takes to own and properly maintain a building.

For example, if there is a fire at one of the commercial properties you own, it can take weeks and even months to properly deal with the insurance companies, the paperwork, the back and forth, the legalities, the cleanup crews, and the rebuilding process. There are also the time-related costs of regular maintenance and upkeep to think of.

If the roof needs to be replaced, the parking lot re-paved, a broken front window fixed, or any one of a thousand small tasks related to the ownership of a commercial property, it will take time to manage. If you own the property, it will cost you more than money, it will cost you dearly in time.

If having a life outside of work is important to you and your family, factoring in the sheer amount of time and effort it will cost you to own a commercial property should be a major consideration in your decision to rent or buy.  Very often, if you’re a tenant and an issue arises at a building owned by the commercial real estate leasing and property management company you work with, it isn’t your concern!

Instead of getting bogged down in day-to-day details, renters can instead focus on managing their business and growing their revenue, confident that the property management company will take care of it for them as a part of the agreement. Things like general maintenance and repairs, contract and award management, cleaning, maintenance, project management, rent collections, and even landscaping  can be included, saving you valuable time.

In this context, the choice of renting comes out on top again!

Renting Commercial Properties: The Better Choice

While everyone’s choice will differ based on their specific business, their financial situation, their location, and even their personal values and preferences, in many cases it just makes more sense to rent, rather than to buy commercial property. This is especially true in Ottawa, whose location and vacancy rates make it an attractive proposition.

Besides it being much more expensive and time-consuming to own, tenants at commercial properties face much less risk over the long term. The consequences and future implications of 2020’s global pandemic on the property market have not yet fully played themselves out, and commercial real estate is therefore a risky investment.

In the end, at least at this point in time, if you’re a small or medium-sized business, it is definitely a better time to rent or lease, rather than to own.

If you happen to be in the Ottawa area and are thinking about renting or leasing property, it pays to do your homework and consult with the experts before making any decisions. Contact the team at Merkburn for more information – you’ll be glad you did!