Downtown Cleveland’s real estate market is having a great year.
Major employers like Spero-Smith Investment Advisers and Fox Sports Ohio announced they would move downtown from their suburban locations and Benesch became the first announced office tenant for nuCLEus, a planned $300 million mixed-use development in the Gateway District, according to a report from Downtown Cleveland Alliance.
Demand for downtown Class A office space is outpacing the demand for suburban locations and the grand opening of Heinen’s in the historic Cleveland Trust Rotunda led to an influx of 15 downtown retail commitments in the year’s first quarter, per the report.
The confluence of growing confidence in the economy and an understanding that at some point, the Federal Reserve will begin raising interest rates is leading to strength in the real estate market, says Rico A. Pietro, SIOR, a Principal at Cushman & Wakefield Cleveland.
“People likely have never seen a healthier market,” Pietro says.
Smart Business spoke with Pietro about the commercial real estate market and what you should be thinking about as you decide how and where to invest your money.
What is the mindset of prospective commercial real estate investors in today’s economy?
Flexibility is very important in today’s market, whether it’s the terms of the agreement for the space or the space itself. Things can change so quickly in the current economy that business owners don’t want to be locked into anything that could put their company in a restrictive situation. So they are evaluating lease vs. buy options and attempting to make a decision that best fits their needs.
You want to be comfortable with the choice you make and confident that you’ve considered all the alternatives that are available to you. If you’re a startup company, consider leasing space to help you maintain that valuable flexibility. Use your cash flow to reinvest in your company so you can get to a point where you have a good sense for what your company’s space needs will be. At that point, you can more confidently commit to a property on a long-term basis.
The biggest mistake you can make is to buy a property that doesn’t fit your long-term goals. You get a big win by securing a new customer, but then discover you’ll need at least 50 new employees to manage all the business from that account. Unfortunately, you just committed to a building that doesn’t have that much space and now you’re stuck. Whether you’re a startup or an established company, you need to keep the future in mind when making real estate investments.
What are the advantages of leasing vs. buying?
Leasing is less of an economic commitment and as the market does change, you ride the wave. If it’s a down market, you’ll be rewarded with a more affordable occupancy cost. And in the event you sell your company, real estate space that is leased is not a contributing factor in the valuation of your company.
When you buy property, you’re creating value both for the property and for your business. Buying also gives you consistency when it comes to your annual occupancy costs. And if the market is doing extremely well, your mortgage payment remains the same.
What other real estate options exist for today’s business owner?
Many business owners find that they are now using less space in their current location. Employers are moving to a more collaborative concept that combined with the growth of technology and the resulting reduction in hardware necessary to support that technology has freed up space for other uses. A willing business owner could take that space and turn it into a revenue source by re-leasing it to other tenants.
Another option is to take the extra space and use it to bolster your own company’s culture. It could be an area where leaders and employees can brainstorm about projects they are working on. Or you could create a space where employees can get away from their work for a bit to recharge their batteries. If that increases productivity, that can provide a boost to the bottom line as well, even if it’s a little more difficult to measure.
Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate
