With the volatility in today’s commercial real estate market, companies are looking at every
aspect of their business to see how they
might improve their operating results.
With a host of uncertainties due to current economic conditions, revenue,
expenses and bottom lines are being
scrutinized, and alternatives are being
considered to traditional methodology.
One option for some is the consideration
of owning their real estate versus leasing. As firms look to make strategic decisions today to positively affect future
results, this alternative is being looked
at more closely.
“With so many questions facing companies today, many are looking at aspects
of their business where they can, in fact,
exercise some control,” says Rick
Narkiewicz, a first vice president and
industrial specialist with CB Richard
Ellis in Tampa. “One of those line items,
and a formidable one at that, is the cost
associated with their real estate.
“There are a number of factors that go
into owning versus leasing, but without
question, it can make sense for some,
especially in today’s market. As land,
labor and material costs have trended
lower, there is a window of opportunity
that is certainly worth exploring.”
Smart Business spoke with Narkiewicz
about some of the factors that go into
considering this option as some firms
plan for the future.
What are some of the reasons companies
are considering ownership versus leasing?
The reasons will vary depending on the
company; however, we have seen some
common factors in recent decisions.
First, with the desire to run as efficiently as possible a facility that is built to a
specific user’s needs is a key step in the
right direction. The ability to plan for
work force and work flow can greatly
enhance productivity. Second, the cost
of ownership can be assessed not only
for today but can be carried forward to
stabilize that important expense line for
future planning. For example, lease rates
on industrial space have increased
approximately 30 percent since 2000.
Those who owned their facilities were
spared this rapid rise in operating costs.
Third, real estate has traditionally been
an excellent long-term investment, especially for small to midsized businesses. It
is not uncommon for the ownership of
the company to hold the property in a
trust and lease the facility to his or her
company. They are essentially their own
best tenant, which is a viable vehicle to
build long-term wealth. Finally, there are
certain tax benefits that can help make
ownership a positive benefit for the
company overall.
Are these factors unique to industrial properties?
No, but the industrial sector does have
some unique factors that make ownership particularly attractive. Many industrial users utilize heavy equipment that
cannot be off-line or can be very difficult
to relocate. As such, control over their
facility helps ensure a stabile long-term
environment. Another factor to consider
is the location of the facility, which
affects both inbound and outbound
movement of product in the course of
doing business. Strategic positioning can
bring significant cost efficiencies where
margins are constantly challenged by
increases in transportation, labor and
other external factors. Finally, most
industrial users fit in a broader scheme
of logistical supply so proximity and
accessibility to major thoroughfares and
rail are essential.
Is financing available for projects in today’s
credit restrained market?
This is perhaps one of the real key factors in considering ownership today.
Lending criteria has tightened significantly over the past year. This applies
not only for possible debt financing but
for capital dollars, as well. Subsequently,
owners as well as tenants are challenged
as they seek to obtain dollars for tenant
improvements. However, in the case of a
creditworthy, owner-occupied building,
we have found the lending sources are
available, and at attractive rates in most
cases. Here again, costs can be ascertained and planned for over time.
Do you recommend ownership versus leasing?
It all comes down to the needs of the
particular client. In some cases, a client’s
needs may be such that he or she
requires a greater degree of flexibility in
needs and therefore feels he or she cannot commit to a more stabilized, long-term scenario today. Some simply may
not have the credentials to support such
an investment. However, it is well worth
the comparative exercise to measure
ownership against leasing. Today, it is
incumbent to explore all of one’s options
before committing. In the end, it’s the
bottom line that will help define long-term success.
RICK NARKIEWICZ is a first vice president with CB Richard Ellis specializing in industrial properties. Reach him at (813) 273-8444
or [email protected].
