If you’ve looked into buying or leasing new commercial property lately, you’ve probably noticed that rents haven’t crept up — they’ve shot up.
It’s a sellers’ market across the board. In the commercial office space market, for example, rental rates are expected to increase by 3.3 percent in 2015 and continue to climb into 2016, according to data from the National Association of Realtors. Increasing rents are followed by increasing sale prices and ultimately value.
Corporate buyers and renters are occupying office space at increasing levels, yet another indication that corporate growth projections are contributing to capital expenditures after the Great Recession resulted in several years of belt-tightening.
With many organizations busy making plans to grow their commercial property portfolio, here are some important tips to keep in mind.
- Remember the purpose of the asset and the local labor market: Commercial property is not merely a space to occupy. It is your company’s workplace where your company delivers specific products or services. Whether you’re looking for warehouse workers, creative minds or paraprofessionals, your asset’s proximity to a desired labor pool is paramount. You must understand the local labor market. It’s no coincidence that Austin, Texas became a hub for R&D and technology space — the city is home to the flagship campus of the University of Texas, which hosts the fifth-largest single-campus student body in the nation. Many smart companies buy or locate their offices in Austin to attract talented local graduates.
- Consider the costs of owning versus leasing: There are advantages and disadvantages to both owning and leasing commercial property. As you’re looking to acquire new space, consider your costs. For instance, the price of steel and lumber has risen in recent years, and getting building permits can be challenging these days. If you’re leasing space, take the time to do a space utilization study to figure out, ahead of time, exactly how much square footage you need. It’s always easier to negotiate renting less space up front than it is to negotiate a lower rent later. Besides, any landlord will work with you when you need to grow.
- Don’t expect concessions, at least not now: As a buyer in the commercial real estate market today, you don’t have the upper hand. Demand is rising and supply is shrinking. In 2012, you might have convinced a landlord or seller to pay for or credit the purchase price of building deficiencies such worn-out roofs or non-functioning HVAC systems. That’s not likely today as the seller can afford to hold out for the next prospect.
- Don’t allow buyers’ anxiety get the best of you: While it is a sellers’ market, don’t let that push you to make a move you’re not ready for or comfortable with. It’s shortsighted to think that you must buy or lease right now or risk missing out on what you need. Market conditions will change and new buildings will come on the market - plus, it won’t remain a sellers’ market forever.
- Go beyond basic due diligence: One element of commercial property acquisition that often flies under the radar of a busy CFO is property tax assessments and the associated liability after acquisition. Commercial property taxes are the largest cost of corporate occupancy. Without thorough property tax due diligence to model your potential liability after you occupy the building, you could pay significantly more than you planned after closing.
- Know how you’ll be taxed: While corporate income tax gets most of the attention from CFOs, commercial property taxes should not be overlooked. If you’re expanding into new markets , it’s important to know whether you’ll have to pay personal property taxes on your tangible assets. Moreover, some states tax inventory regardless of whether you shipped your product out or not, while others have a 100% Freeport exemption for inventory.
In some situations you may be eligible for a commercial property tax abatement due to the economic growth your business brings to a region. If you’re building a manufacturing plant, consider locations that offer tax abatements in exchange for the jobs and economic development that your business generates.
To make the right decision on whether to buy or lease commercial property, you need to do your research. Dig deeper to uncover your true cost of occupancy and fully understand your property tax payments.Discover Overlooked Opportunities For Reducing Occupancy Costs FREE WHITEPAPER: 4 Tips For Managing Occupancy Costs During A Corporate Real Estate Expansion