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I once authored a column entitled “Worst mistakes occupants make.”
Among the missteps were buying instead of leasing, leasing instead of buying, signing a short-term lease in a downward trending market, or signing a long-term lease in a peak market.
Let’s go over that again as the market seems to be again in a bit of a tailspin.
Buying: A new, rapidly growing business generally finds a better fit leasing for a term than investing precious operating capital into a static purchase of real estate.
Conversely, if the company has been around a while, is privately owned, has generated a profit for the last two years, has an ownership structure that can benefit from depreciation and can afford the down payment and debt service, enormous generational wealth can be created by owning the facility from which your enterprise operates.
Leasing: When an economic outlook is fuzzy, most operations hedge by making short-term lease deals.
In fact, much can be gained doing the opposite. While the world zigs, you should consider a zag. I have seen companies goof by signing term leases when things are frothy only to see the monthly amount they pay be dramatically greater than current rates – and they’re locked in.
Most would agree we are in a changing market with respect to industrial real estate. Those occupying retail and office spaces are way ahead of us as their markets morphed years and months ago. With retail it was pre-pandemic and office was a result of the pandemic. But, now here we are with an uncertain future for manufacturing and logistics spaces.
So, if you lease an industrial building and you are approaching a renewal, what strategy should you employ?
Assuming the space still works for you – location, size, and amenities – consider your owner. How does she view the current conditions? Is she bullish, bearish, or running for the exits? If she falls into category two or three, she’s probably willing to forego a risky vacancy in favor of constant cash flow. Read: make a deal!
Another idea is the “blend and extend.” We saw a ton of these used in the early 2010s, and they exchange a lesser rate today for additional years added to the lease term. Both are effective.
Just know your owner, know your alternatives, understand your cost to relocate, and finally, be familiar with the cost to replace your tenancy.
Allen Buchanan is a principal and commercial real estate broker at Lee & Associates, Orange. He can be reached at 714.564.7104 or ab*******@le************.com.
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