Weighing the options when it comes to buying or leasing property
As the general economy continues its strong run, there is a shift in mindset among some business owners. Many owners of light manufacturing, distribution and warehouse related businesses are looking at their future plans and debating whether buying space is a better long-term strategy than leasing.
The cost of buying is favorable, as interest rates and other financing costs remain low. Pricing is still advantageous for owners, but is edging up in many parts of the Chicago market, particularly in submarkets where inventory is low. Further, depending on the size and scope of the business, there may be good financing opportunities through the Small Business Administration.
To determine whether to buy or lease, owners should start by taking a close look at their 5 to 7-year growth projections. This process should be balanced between examining historical trends and future projections. How has the company's particular industry segment fared through various market and economic cycles? What patterns emerged over the past 3 to 5 years that would support long-term growth? What obstacles had to be overcome — and are they manageable for the long term?
This type of growth evaluation should include factors that go beyond typical sales and expense projections. Major business/capital expenditures should also be considered. For example, will any further expansion of the business require additional substantial investment in equipment, supplies and personnel? Will the business be located in an area with a strong employee base to support future growth?
Companies with multiple locations face a more complex scenario. While it might make sense to buy a building in an entrenched market, it can be riskier to do so in new locations. At the same time, depending on inventory, it may be practical to consolidate multiple leased locations into a building that is acquired. Owners should evaluate individual locations and markets as they debate the buy versus lease decisions.
When opening a new location, there are merits to leasing to provide flexibility. A business owner may not want to commit to buying a building until there is a determination of how well the business is performing in that market. Are goals being met? Is there long-term growth potential in that market? Is there a strong employee base to support growth?
Some businesses have approached new locations with an emphasis on shorter term leases with an option to expand or buy in the future. By adding flexibility into a lease, a company can protect its interests while still remaining open to buying in the near future.
Among the growing industrial business sectors today are those related to logistics, including companies that support e-commerce distribution and those related to trucking. Distribution related businesses typically require taller ceilings, several loading docks and proximity to a strong labor pool. If those fundamentals are in place and the long-term growth outlook is positive, buying space can be a wise move.
There are many advantages to owning space, particularly in a market such as Chicago. With 1.3 billion square feet of industrial space and the benefits of major air, cargo, rail and roadway systems, Chicago is one of the strongest industrial markets in the country.
Strong leasing, construction and capital market sales have propelled the industrial industry to record level in recent years. This activity is expected to continue at a steady pace for the near term. With proper evaluation and projections, business owners can make sound decisions about whether buying or leasing is the best move.
• Dan Brown is principal/managing partner at Elk Grove-based Brown Commercial Group, a privately held commercial real estate company specializing in the leasing, sale and acquisition of industrial and office properties throughout the Chicago market.