If you own or manage a business, chances are you occupy some form of commercial real estate.  Every few years you will reach a point where you need to reevaluate your space needs going forward.  Sometimes that is driven by a lease expiration, business expansion, or even industry changes.  These tips will help you decide if you should lease or buy.

There are many factors to consider, beginning with market conditions. In any market or submarket, supply and demand will ebb and flow over time. Timing always affects your decision to lease vs. own based on current or future projected supply of suitable available properties that meet your requirements.

LEASE OWN
Advantages:

  • Less upfront capital required to occupy
  • Tax-deductible operating expenses
  • Excellent source of financing
  • Flexibility for the business to move
  • Facility expense cost stabilization
Advantages:

  • Total control
  • Stable Investment
  • Accumulation of Equity
  • Tax Benefits from Depreciation
  • Potential Income
  • Pride of Ownership
Disadvantages:

  • Exposure to Rate escalations
  • No Control over your neighbors
  • No control over landlord actions that affect your business
  • Limits what you can do with the facility
  • No equity accumulation or asset appreciation
Disadvantages:

  • Distraction from Core Business
  • Upfront Capital Required
  • Interest Rate Risk
  • Asset Value Fluctuation
  • Physical Plant Risk Exposure
  • Possible Negative Impact to Balance Sheet
  • Lack of Flexibility


So… is now a good time to lease?

The short answer to that is no. Today’s average rental rates are up over 7.5% in Central Florida compared to this time last year.  Average vacancy rates are down below 7.4% overall with some submarkets reporting in the mid-4% range. While we have clearly moved out of the recovery phase and into the expansion phase, some industry experts believe that we are now entering the Hypersupply (contraction) phase in certain parts of the country. 

Industrial property in these areas is driven by a number of factors including:

  • Organic growth
  • Supply chain shifts
  • Availability of capital
  • Unemployment rates
  • Population growth
  • Tourist traffic

Let’s take Central Florida as an example. Unemployment rates are trending lower than both state and national rates by a significant 4.5%.  Florida’s population (of over 20 million) is on the rise with an estimated 1,000 new residents into the state every day.  This coupled with over 100 million annual visitors creates significant demand for products and consumables These products must pass through an increasingly decentralized supply chain to reach the consumer, making industrial properties and logistics companies the direct beneficiaries of that change. 

The US economy has benefited from 76 straight months of slow and steady economic recovery.  The average length of economic cycles in the US since WWII is 58 months.  With credit beginning to tighten, upward pressure building on interest rates, and diminishing global economic growth prospects, there is a possibility of a slowdown in industrial market in the coming 18-24 months.  However, if your region benefits from strong local and regional growth, your market may not retreat as far or as fast as other primary industrial markets across the country.

The best option is to know your options, seek the help of a trusted professional and base your decisions on real-time information.

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