Leasing Versus Owning Industrial Assets
When determining whether to lease or buy, there are multifaceted considerations that businesses need to consider that extend beyond the immediate financial impact. The industrial market‘s post-2019 bull run introduces additional complexities, making careful evaluation crucial. As real estate claims the second highest expenditure for most businesses, surpassed only by employee wages, a nuanced approach is essential, ideally guided by an industrial real estate broker.
Common Questions Asked by Those Looking to Lease or Buy
- How do company executives decide to buy or lease a warehouse?
- Do current market conditions determine the decision, or is it based on the long-term financial goals of an organization?
- Is buying or leasing a simple real estate decision, or can it further impact the overall business?
Benefits of Leasing
Lower Upfront Costs
With lower financial costs, leasing provides a financial advantage, especially compared to the substantial investment required for purchasing
industrial real estate. Most of the time, businesses can get a better return by investing money into their business compared to real estate appreciation. Whether through opening up more locations, hiring more employees, or investing money in R&D, there are more ways companies can leverage the cash without it being stuck in real estate. Current Small Business Administration (SBA) loan market rates further enhance the accessibility of leasing for businesses.
Flexibility For Growth
Leasing provides businesses with unparalleled flexibility for growth, allowing them to adapt to changing space needs, strategically relocate, and explore new opportunities without the constraints of property ownership. With options for renewal, opportunistic decision-making, and the avoidance of a complex selling process, businesses can seamlessly adjust their real estate strategy at the end of each lease term.
Adaptability to Market Conditions
The ability to react to market conditions faster, whether through subleasing space or disposition at the end of the lease term, is another advantage to leasing.
Risks of Leasing
Lack of Equity Accumulation
Leasing doesn’t contribute to building up equity in the property, business owners won’t benefit from the potential appreciation industrial real estate has experienced in the past five years.
Limitations on Modifications/Improvements
When leasing, many landlords will allow some modifications to the building, however, there are restrictions that landlords will encounter when tailoring the building to a specific business.
Long-Term Cost Considerations
Over an extended period, leasing can become more expensive than ownership, especially with the recent uptick in costs for both property
taxes and insurance. In the past year, taxes and insurance premiums have increased by approximately 50%. However, if a tenant is in a
space for 10+ years, it might be more in their favor to own the property in the first place if they have the money to do so.
Benefits of Owning
Equity Building Opportunity
Even with the record high pricing and increase in interest rates, buying a building can allow an owner to build up equity over time as the
property appreciates in value. This accumulated equity can later serve as valuable collateral, providing leverage for business expansion.
Landlord Freedom
When owning a property, investors can modify the building to fit their business. Whether expanding office space or customizing the warehouse, the owner is no longer bound by landlord approval and oversight constraints.
Tax & Depreciation Benefits
When it comes to ownership, significant tax and depreciation benefits come into play. An owner can claim depreciation on the cost of the industrial building and certain improvements over time.
Risks of Owning
Market Volatility & Timing
Buying a building introduces the risk of market volatility. Buying at the market’s peak may lead to a potential loss of value if the value declines. Economic factors such as rising interest rates can negatively impact the property’s value.
Flexibility Constraints
Unlike leasing, buying a property can limit the flexibility of a business. If the company experiences growth and requires additional space, selling or relocating a purchased property can be time-consuming and complex. Leasing can provide more agility in adjusting to changing needs.
Capital Tie-Up
Acquiring industrial real estate requires a significant upfront investment. This capital could be used for other business opportunities, investments, or operational needs. In most cases, businesses can get a better return on investment by investing money into their operations.
Wrapping Up the Pros & Cons of Leasing Versus Owning
When dancing between leasing versus owning an industrial property, businesses face a multitude of considerations that stretch beyond immediate financial concerns. The ever-evolving landscape in the industrial market adds layers of complexity to this decision-making process. Given that real estate is one of the highest expenditures for businesses, a deeper dive is required. Companies must evaluate not just the immediate market conditions but also the long-term financial objections, recognizing the impact of this decision.
The advantages of leasing, like lower upfront costs and flexibility, come hand in hand with risks, such as lack of equity accumulation. Meanwhile, ownership provides equity-building opportunities and freedom of modification but introduces market volatility and capital tie-up risks. An evaluation of these factors, ideally with an industrial broker, is important for making a well-informed decision.
