Thursday, December 29, 2011

Equity's head office location

The following question arose during the recent dues referendum:

Can you please explain why we are renting an office in expensive downtown Toronto. Surely there are cheaper places to rent.

I admit, this issue kind of snuck up on me. The assumption seems to be that, due to our location, we must be paying a frivolously high amount of rent. I don't know how widespread the concern is (according to some, everyone is always talking about it), but it's certainly worth a look.

To start with, the location of the head office is set out in the Constitution, so the Toronto part is a given. However, where in Toronto is not specified. For members not familiar with our address, we are in the heart of downtown, one street off the main drag.

The decision to move to Victoria St. goes back to 1996.We used to have offices not too far away on Richmond St. We needed more space and ended our lease to take advantage of the fact there was a glut of downtown office space at the time. Because the landlord was keen to rent, we were able to secure a very favourable price on a ten year lease for our current offices. 
We have renewed the lease once since then, again for another 10 years, and this time were even able to secure some needed renovations as part of the renewal negotiations.

Council policy requires staff to consider all options for decisions of this magnitude. Upon renewing the lease, staff reported that the new terms were competitive with other suitable locations, both downtown and in outlying areas. They also took into account the high cost of relocation and needed renovations. (Commercial spaces typically lease "as is". At the class of office space we can afford, generally very as-is.)

Yes, the amount of rent is large (about $300K per year to cover both offices), but commercial office space is no cheaper than any other real estate. Still, our rent is way below the typical market rates for the downtown. Our building is rated Class C (the lowest grade), which is described by one commercial real estate source as: "older buildings […] in need of extensive renovation. Architecturally, these buildings are the least desirable and building infrastructure and technology is out-dated. As a result, Class C buildings have the lowest rental rates, take the longest time to lease, and are often targeted as re-development opportunities."

Since posting this originally, I've received a copy of the quarterly office report put out by Colliers International, a major commercial real estate firm. I can confirm that our rent is well below typical for all buildings in the financial core (about 90% are buildings in Classes AAA to B), and about 20% below average for the Class C buildings in the area. Looking from Bayview to Dufferin (the greater downtown area), we are about 35% below average for our class.

OK, so does it have to be downtown? Well, we think it is desirable to be somewhere near the theatre district and where our members live and work, or at least within a reasonable subway ride. Looking at the rest of the GTA, we'd have to travel out to the fringes to get a rental rate that would make the relocation and renovation costs worthwhile. We'll always review the situation again when the lease is up for renewal, but Victoria St. remains a good deal for the moment.

Still not convinced? Do a bit of math. Consider what you would pay for a modest 500sf 1-bedroom apartment, then multiply that by 12 months, then multiply that 14 (we need 7000sf), then add CAM and occupancy costs* sufficient to run an office of 20 people. At this point, you will be well over $200K, which is what we pay for the Toronto office.


*Leasing agreements for commercial office space work differently than residential leases do. They're typically split into two components: leasing of the physical space (net rent), and the common area maintenance (CAM) and occupancy costs. CAM and occupancy includes a tenant's share of heating, electricity, water, property taxes, interior and exterior building repair, office cleaning, window cleaning, snow shovelling, building insurance, waste disposal, security, etc.

4 comments:

  1. Thanks. I've been really enjoying the recent posts on the inner workings of the association.

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  2. You're welcome. If there are specific topics you might be interested in, please let me know through the feedback link just below my photo. I focus on recent Council doings, but I'll gladly take requests!

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  3. Allan, thanks for your research and for bringing these numbers to light.

    Has council considered a purchase? In light of interest rates being the lowest they've ever been and also the real estate market beginning a cool. Would it not be prudent to consider the purchase of an asset that eventually will be paid for?

    Surely, we could pay the same we do now and actually own a building.

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  4. Good question. I will examine this in an upcoming post. Stay tuned!

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