Are You on the Fence? Buying vs. Leasing Commercial Property

In the realm of business, the decision to either lease or buy commercial property is a crucial one, often carrying significant implications for the future of the enterprise. Both options come with their own set of advantages and drawbacks, making it essential for entrepreneurs and business owners to carefully evaluate their specific circumstances, needs, and goals before making a choice.

Let’s explore the pros and cons of leasing versus buying commercial property to help you make an informed decision.

Photo by Pixabay: https://www.pexels.com/photo/white-15120-building-269077/

Leasing Commercial Property

Pros:

1. Lower Initial Costs: Leasing typically requires less upfront capital compared to purchasing property. Instead of a hefty down payment, lessees usually pay a security deposit and the first month’s rent.
2. Flexibility: Leasing offers businesses the flexibility to adapt to changing needs. If your business experiences growth or contraction, it’s easier to adjust your space requirements when leasing, either by expanding into additional units or downsizing.
3. Reduced Responsibilities: Maintenance and repair responsibilities often fall on the landlord when leasing commercial property. This can alleviate some of the burdens associated with property ownership, allowing business owners to focus on core operations.
4. Location Options: Leasing provides access to prime locations that may be financially out of reach for purchasing. This can be advantageous for businesses looking to establish a presence in high-traffic areas or “destination” areas without the commitment of ownership.

Cons:

1. Limited Control: As a Tenant, you have limited control over the property. Renovations or alterations most likely require Landlord approval, and lease terms may restrict certain activities or changes to the space.
2. No Equity Building: Unlike buying property, leasing does not offer the opportunity to build equity. Monthly lease payments contribute solely to occupancy costs without any long-term asset accumulation.
3. Rental Increases: Lease agreements typically include provisions for rent escalation over time. While this allows Landlords to keep up with market trends and increased costs due to economic fluctuations, it can lead to increased occupancy costs for tenants, affecting long-term financial planning.

Image by Tumisu from Pixabay

Buying Commercial Property

Pros:

1. Ownership and Equity: Purchasing commercial property allows businesses to build equity over time. Property ownership can serve as a long-term investment, potentially yielding returns through appreciation and equity buildup.
2. Control and Customization: Property ownership grants full control over the space, enabling businesses to customize and modify the property according to their needs without seeking landlord approval.
3. Stable Costs: With a fixed-rate mortgage, businesses can enjoy stable occupancy costs, unaffected by fluctuating rental rates. This predictability can facilitate better financial planning and budgeting.
4. Potential Rental Income: Owning commercial property provides the opportunity to generate additional income by leasing out unused space to other businesses or tenants, thereby diversifying revenue streams.

Cons:

1. High Initial Costs: Buying commercial property entails substantial upfront costs, including down payments, closing costs, and potential property improvements. This can be a barrier to entry for some businesses, particularly startups or small enterprises.
2. Maintenance Responsibilities: Property ownership comes with maintenance and repair responsibilities. Businesses must allocate resources for upkeep, repairs, and property management, which affects the bottom line.
3. Limited Flexibility: Unlike leasing, owning commercial property ties your business to a specific location. Relocating or expansion needs may involve selling the property, which can be time-consuming and costly.
4. Market Risk: Property values are subject to market fluctuations, and economic downturns can impact property appreciation and rental demand, potentially affecting the property’s investment value.

Image by Foundry Co from Pixabay

When it all comes down to it, there is no one-size-fits-all answer. Each option presents its own set of advantages and disadvantages, and the decision ultimately hinges on factors such as financial resources, business objectives, and long-term strategy.

By carefully evaluating the pros and cons outlined above and considering your unique circumstances, you can make an informed choice that aligns with your business goals and aspirations. Whether leasing or buying, the key is to approach the decision with thorough research and foresight to ensure a sound investment in the future of your business.

We’re eager to connect and dive deep into your vision for commercial property leasing or purchasing. Let’s explore your long-term goals together and leverage our expertise to analyze data, conduct research, and identify tailored options that fit your needs. As locals deeply rooted in this community, we’re not just passionate about the area—we live and breathe it. Count on us to bring our local insights and dedication to your real estate endeavors, ensuring a seamless journey toward your objectives.

The Hot Topic: How Hiking Interest Rates Are Shaping Commercial Real Estate

Commercial real estate has been a go-to investment for individuals, institutions, and corporations looking to diversify their portfolios and generate steady returns.

Like anything else, the commercial real estate market is not immune to external economic factors, and one of the most significant factors that can throw things off-kilter is interest rates. As interest rates rise, the commercial real estate landscape experiences a series of profound effects that can impact investors, property owners, and the market as a whole. In this post, we’ll dive into the various ways in which rising interest rates can rock the world of commercial real estate.

Borrowing Costs Go Through the Roof

As interest rates climb, the cost of borrowing for commercial real estate shoots up too. This can make it more expensive to finance loans for property acquisition or development, putting a damper on new investments and making it more challenging for existing property owners to refinance their debt. The higher borrowing costs can lead to reduced property valuations and limit the profitability of real estate projects, potentially slowing down the market.

Property Values Take a Hit

Higher interest rates tend to lower property values because the higher cost of borrowing reduces the demand for commercial real estate. As the pool of potential buyers or renters shrinks, sellers may have to lower their asking prices to attract buyers or tenants. This decline in property values can have a cascading effect on the overall market, leading to lower returns for investors and causing concerns among property owners. Let’s look at today’s average rates, courtesy of StackSource.com:

Net Operating Income Gets a Squeeze

Rising interest rates can affect the net operating income (NOI) of commercial properties. When property owners face higher mortgage payments due to increased interest rates, it can put pressure on their cash flows. As a result, property owners may have to increase rents to maintain their profit margins, which can be challenging if the local market is not conducive to higher rental rates. This can create a delicate balancing act for property owners and investors.

Investors Reassess Their Game Plan

In a rising interest rate environment, investors often reassess their portfolio allocations. With the expectation of lower returns and increased borrowing costs in the commercial real estate sector, some may shift their investments to other asset classes that offer more attractive risk-adjusted returns. This shift in investor preferences can lead to reduced demand in the commercial real estate market and further impact property values.

Property Types Are Not Created Equal

Different types of commercial real estate may be affected differently by rising interest rates. For example, the impact on office and retail properties may be more significant than on industrial or multi-family properties. The demand for office space, for instance, may decrease as businesses cut back on real estate expenses in response to higher interest rates, and let’s not forget that many companies are still allowing remote work and/or hybrid schedules for their workforces. Understanding how rising rates affect specific property types is crucial for investors and property owners to make informed decisions.

The effects of rising interest rates on commercial real estate are far-reaching and complex. While higher rates can lead to increased borrowing costs, reduced property values, and shifting investor preferences, they may not necessarily spell doom for the market. Investors and property owners who keep themselves informed and adapt to changing economic conditions can still find opportunities in the commercial real estate sector. Strategies like selecting the right property types and adjusting financing options to mitigate the impact of rising rates can help navigate the challenges posed by changing interest rates. Ultimately, commercial real estate, like any investment, requires careful planning and risk management to thrive in a dynamic economic environment.

Looking for direction?

Call us today at (610) 444-7770 and let’s walk through your property investing goals, assess your risk factors, and articulate a plan that makes sense for the long game.

Business: Expectations vs. Reality

Our Next Steps as Business Owners

Businesses have been swept up in a whirlwind these last few months, some still in a holding pattern, some barely surviving and others, well….thriving.

Let’s step back for a moment. Think about when you decided to start your business. Remember the vision that seemed like it was “placed” in your brain? Whether you used vision boards or something as simple as graphing paper and #2 pencil, it flowed out of you because you saw something, you knew something, you put it together in your mind and it came out as a plan which then became framework, which became a business model, then business plan and so on and so forth and the rest is history, right?

Now, let’s step into the here and now once again. Here we are, fellow business owner, in the middle of a pandemic and newly evolving guidelines presented to you practically every morning. You are meeting with your management team via zoom or spread out in your conference room awkwardly, observing social distancing requirements. Finances, Human Resources, Safety Committees, Operations on “high alert”…so many factors, so many things to manage. Is there light at the end of the tunnel, or is this more like a cyclone?

America has experienced catastrophic situations since its inception. Through each tumultuous trial that we have faced as a nation, one thing has been a constant. Americans are resilient. American business owners are fierce. We are innovators, inventors, and imaginations run wild, even when chaos is all around us.

From what I am observing, the businesses that are “thriving” have taken a moment, poured a cup of coffee or tea, turned off the noise and had a reality check of their own. You’re sitting there in your quiet place, probably holding your head, saying to yourself, “I had a plan, I have expectations…now what?!?”

Don’t forget every expectation that you had coming into 2020, however, you are going to need a reset mentally and operationally because as with all of the aspects of life, we have to adjust our expectations to meet our current circumstances. Some businesses are still rolling along because they’ve made “adjustments”. They didn’t loose their identity nor did they throw their vision in file 13. They did re-envision their business models and came up with ways to continue to offer their services, manufacture and sell their products in innovative ways that worked in a COVID-19 environment.

So, a word of encouragement to business owners who feel like they are in the cyclone rather than a brief stint in the tunnel: You were visionary and innovative and creative and clever when you started this business of yours. You still ARE! Gather your team and have brainstorming, collaborative sessions. Make ways in the desert. Focus on the positive. In 2020, you have so many different internet/digital avenues to keep your message, your brand, even your new offerings out in front of your potential client base. Make your name known. Provide special offers to potential clients. Create community by making a concerted effort to build a “fan base” within your social media channels. Make friends with other local business owners and give them props on your channels. Feed the unity and draw the community closer together in this time “apart”, and thrive in this season of uncertainty. Your new normal, your new reality might be your next favorite vision.

Population Increases in this Town that Started with a Tavern

This town that was originally granted to a a ship captain by William Penn himself. In  1762, Phineas Eachus and Chest Weaterson were given a license to construct a tavern in West Chester, PA.  This former “no-name” tavern operated for almost 200 years as a tavern/hotel and served as a pseudo-stock exchange platform (on its front porch) for the local banks in the town, where the public could purchase in an auction format.

Known as the dining destination for the Brandywine Valley, West Chester has recently received new notariety as the fastest growing town in entire state of Pennsylvania. Why do newcomers flock to West Chester to do life?

Some suggest:

• Walkability
• Historic Location
• Great Schools
• Low Crime Rate
• Diversity
• West Chester University
• Great Retail District
• Festivals/Events/Things to Do/Parks & Recreation
• Haute Restaurant Hub

(Photos courtesy of Wikipedia By Camerafiend – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=58340546,Zoewscott at English Wikipedia)

 

 

 

 

Through the Looking Glass (Part 3) – Commercial Real Estate in 2015

As we dove into 2015’s waters, investment capital stats were already at in influx. The US has traditionally been a favorite depository for said capital. With US Treasury Rates on a decline due to demand and  the US Stock Exchange experiencing new elevations, commercial real estate is an attractive invitation for both foreign and domestic investors. The evidence of this is the growth of overall commercial property transactions in the US by foreign investors has now arrived at a level that we haven’t seen since 2006/2007. Firms aim a close eye at interest rates and market stability as they compare these current statistics with historical data. The timing for interest increases is concerning for most, and whether long term and short term rates will increase in a united or disjointed manner. A majority of soothsayers, (correction: forecasters), hold the belief that the Federal Reserve will raise  rates Summer of 2015. Out of the estimated $5 trillion plus capital invested in the United States, over $3 trillion is debt-driven. Commercial real estate loans are steadily gaining as per the Feds, with private equities and REIT’s in the lead. There is speculation that we will see a “re-do” of 2006 where large sums will be reinvested into #cre in 2015 if all goes according to pattern. Is your brokerage positioned for these potential opportunities? Are you as an investor positioned to take advantage of this stimulative climate and seize the day?

Through the Looking Glass (Part 1) – Commercial Real Estate in 2015

Well it is that time again when the economists, financiers, commercial real estate execs and genies make their predictions for the New Year. As predicted by the Delloitte Center for Financial Services, rents and vacancies showed improvement, development pressed pause, REIT’s and foreign investment led the charge in activity, the standards for CRE lending were allayed and leasing was partially determined by tenant’s use of technology. The majority of sources remain positive regarding 2015’s outcome.

We have good news on the unemployment sector. The majority of the US saw a downturn in unemployment. That evidence includes those that vacated the workforce. For 2014, here are the stats:

States where unemployment experienced an annual increase:

• Alaska
• Louisiana
• North Dakota
• Vermont
• W Virginia
• Wyoming

States that experienced no change:

• DC
• Iowa
• Oregon
• Virginia

While Puerto Rico’s unemployment decreased, they still hold the highest unemployment rate at 14 percent.  The average in the nation in December was 5.69 according to NCSL data.

The prevailing inclinations as we gaze “through the looking glass” are:

• Enduring returns of REIT’s
• Expanded funding sources on a global scale
• GDP growth trend
• Investment transactions rise
• Construction Industry gradual recovery
• Technology advances
• Industrial property development growth
• Suburban markets making a comeback

The potential perils and pitfalls foreseen in wonderland, pardon me, CRE-land include currently delayed, yet inevitable Treasury rate escalations, federal regulatory ambivalence, the predicted plunge in US labor force growth two years from now, aging infrastructure and vacillating energy prices.

In Through the Looking Glass (Part 2) we will further explore the nuts and bolts of the industry findings…stay tuned.

Resources:

Deloitte Center for Financial Services, Deloitte Development LLC, 2014 “2015 Commercial Real Estate Outlook”

Urban Land Institute & PWC, “Emerging Trends in Real Estate – US and Canada 2015”

National Conference of State Legislatures, http://www.ncsl.org/research/labor-and-employment/2014-state-unemployment-rates.aspx, December 19, 2014

PA Acquisitions News – CrossAmerica Partners LP and CST Brands

An Allentown company, CrossAmerica Partners LP and its partner CST Brands Inc have conjoined in an agreement for the purchase of Erickson Oil Products Inc. and specific related assets. CrossAmerica is a leader in wholesale distribution of motor fuels. This $85M deal will allow CrossAmerica to initially operate all of the Freedom Valu convenience stores, but is expected to transfer the operations over a period of time. Gary Vander Vorst, President of Erickson Oil feels that this acquisitions will promote Erickson’s growth and cause it to be more competitive. This opportunity has also opened new doors to new markets for CST and CrossAmerica. The transaction is scheduled to close in the first quarter of 2015.

(Photos Courtesy of CrossAmericaPartners.com)

Care to Dance?

When analyzing the current economy and market conditions, often times Commercial Real Estate and Residential Real Estate are assimilated in the reports. Although similar, they are often found dancing to different “tunes” on the same dance floor. What I mean by this is that although they are operating simultaneously in a wavering economy, they are distinct, which has allowed for the Commercial Real Estate industry to “creatively” overcome and seek sustenance in other ways that the housing market does not provide. Some examples of those new dance steps are:
REIT Running Man:
REIT’s are pushing for rent increases on multi-units, due to apartment and housing turnover trends at record lows due to inability to acquire mortgages. Public REIT’s are said to be paying yields in the 3.5% range. If you shift to the private sector, you can expect somewhere in the 8’s. Commercial Real Estate can also be considered an inflation hedge.

Buy or Build Butterfly:
Large Developers are focusing on new construction retail projects while some remain conservative favoring property acquisitions. When considering an acquisition, take a careful look beyond the cash flow. What will the rent income be when the current leases terminate? Novice investors miss this all of the time. Commercial Real Estate as a whole is driven by jobs, particularly the office and industrial sector. Consumer spending drives retail. Although the multi-unit industry has made remarkable improvement, we see a need to shrink the chasm between new construction costs and trending rental rates.

Land Limbo:
Buying land in the current market can be sketchy at best. Land with approvals, availability of utilities and located within the “right market”…it’s like trying to find a customized car with all of your wish list features off the lot of the used car dealer. Before jumping in with both feet, most investors are considering several items of interest when performing their due diligence:
Demand – What is the demand for the project?
Dinero – What will my ROI be and how far out can I expect my rate of return?
Domination – What bureaucratic hullabaloo will I have to endure to gain the “blessing” to execute this project and how long will it take to come to fruition? Also, will you be able to sell the property when you are ready to? What will it take?

The Lean,..oh I mean GREEN wit it, Rock wit it:
As an owner/investor, green solutions can potentially provide tenant attraction and maximize your property value. Applying Green initiatives to your current property can influence negotiations, improve operations and sustainability, boost tenancy and rent rates, improve the property to optimize sales price and attract “green” buyers.