Recent developments in the commercial real estate world could make it seem like leasing is becoming a less attractive choice. An ongoing climate of low-interest rates make purchasing less expensive, while skyrocketing property values in some markets could make it seem like if you don’t own, you’re missing out on an opportunity to participate in appreciation. At the same time, changes in lease accounting standards are removing some of the financial benefits of leasing.
While these might seem like bad times to be a tenant (or a landlord, for that matter), nothing could be further from the truth. It might be better than usual to own property, but if leasing space is truly the best option for you, none of these factors matter.
Why You (Should) Lease Space
The first reason to occupy space as a tenant is that it is typically less expensive than buying space. While you have some costs for deposits and tenant improvements, those pale next to the price of a down payment and reconfiguring an additional building. Furthermore, finding high-quality small space in a standalone building can be tricky if your company is looking for a relatively small area. This is especially true if you need to be in a Class A high rise or an industrial space with an elevated clear height.
The following reason to lease space is that you typically have more options to choose from. In most central business districts, the majority of the office space is located in buildings that are available for lease. While suburban markets may offer more owned space, much of that is in the extremes of large vacant campuses and small neighborhood offices and office condos. Neither are suitable for most tenants.
Advantages to Leasing Your Commercial Real Estate
Leasing space is also much more flexible. With a leased space, you can get in or out of the space whenever your lease rolls over. While barring a non-prepayable and non-assumable mortgage, you can sell a building you own whenever you want, actually disposing of a vacant piece of real estate can be extremely time-consuming, especially if you are not willing to let it go for a very low price. Choosing to lease makes it much easier for your space to change to track your business’s evolution rapidly.
The ability to leave leased space also means that you can leave expenses behind. For example, if a space needs major tenant improvement work, it could be time to move to a different building and let the new landlord pay for the TIs as a part of the move-in concession package. When a building needs work, the landlord usually has to pay for it and, if he doesn’t, you can move out before those issues become pressing enough to require you to put capital in. Owning the building means that you acknowledge its problems, as well.
Finally, being a tenant in a shared space allows you to be part of a community. You can do business with other vendors in your building. Your employees can run into their employees at lunch counters or happy hours. These interactions can simplify your network of vendor relationships and provide additional glue to reduce worker turnover. Being alone in owned real estate makes it harder to get these locational benefits.
All of these factors exist regardless of how leases get treated by your accountant and regardless of the greater commercial real estate economy. However, if they match up with your company’s needs, leasing space is probably still your best option.
If you have any questions on this article or need commercial space, contact us anytime, we’re happy to help. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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