Should I Buy My Next Commercial Space? The Pros and Cons

If you are looking for a new, long-term commercial space, it is logical to wonder if it’s worth buying your next property. There are many factors to consider when making real estate decisions.

Market fluctuations, projections for your company’s growth, and geographic decisions can all influence your buying process. But, no matter what you choose, it is critical to make sustainable decisions that cultivate the long-term success of your organization.

Buying a space is a big decision for your company. Before you make any decisions that you will be feeling for at least 20-30 years, it is important to weigh the pros and cons. Purchasing a space can be a wise financial decision for the long-term well-being of your business. However, with big rewards come significant risks. It may not be for everyone.

As tenant reps, we have an eye on every aspect of the real estate market. We have helped clients both lease space and purchase properties. With a keen understanding of these processes, we can help you determine when it would be fitting to buy or lease corporate spaces.

Our points of expertise have been woven into this article so you can make the best decision for your corporate real estate portfolio.

Buying a Commercial Space

Pros:

Equity

Perhaps the biggest advantage of buying a property is the equity associated with the purchase. This property becomes a valuable asset owned by your company. Therefore, any money you put into the space for tenant improvements only stands to multiply in the long run.

When you pay for renovations during a leasing term, you are increasing the value of the space. That means that the money out of your pocket is benefitting your landlord. After you leave, the improvements you paid for will still be left behind. The landlord can then increase the asking price for the space that you enhanced.

When you own a space, any renovations you complete will directly increase the value of your building. If you ever decide to sell, you can do it at a heightened rate.

Real estate is also an asset that traditionally increases in value over time. Therefore, the money you spend now in a down payment could greatly increase in the future as real estate becomes more expensive. This means you can stand to make a substantial profit if you decide to sell down the road. Also, due to inflation over time, your owed amount will decrease as the dollar's strength goes down.

Internal Decision Making

When you own your commercial space, you have the freedom to decide how you want to run your building. Leasing space from a landlord allows them to dictate how the facility is operated. You are confined to what your landlord wants.

If you own a space, you have the internal flexibility to make the building a space that will truly fit your company’s needs and culture. When you control the property, you are not limited to the build-outs that a landlord will sanction. Any renovations you make can be as extensive as your organization decides. They can also be completed with more speed because every decision does not have to run up internal and external chains of command.

Owning a property also means that you deal with vendors directly. You are not subject to any extra operational costs the landlord may ask for. You have the power to set your own limits for operations and maintenance. The building is run under your control.

Possibilities for Extra Income

While the upfront cost of buying a building can be substantial, you may save money in the long run. Fronting the price of a space can cut your profit in the initial years. However, it can knock down costs in future years, increasing the longstanding growth of your bottom line.

You are subject to escalations to your rental rate when you lease a space. If your term is long, these additional costs can add up to be a significant expense. On the other hand, you don’t need to worry about rental elevations if you buy a property. Therefore, in the grand scheme of things, you may be saving in occupancy costs.

These savings only stand to grow when considering other possibilities associated with owning a space. For example, you have the opportunity to lease out space within your property to other tenants. With their income, you could occupy your property essentially rent-free. Not only could you break even, but depending on how big the space is, you stand to profit from other tenants' rent.

Buying a space that is larger than your current needs allows you room to lease out space or potentially expand your own company in the future. This boosts your potential profit and encourages your company’s internal growth.

Cons:

Big Upfront Cost

The upfront cost of buying a space is enough to knock many renters off their feet, so it is not reasonable for every company. As an organization, you must have a clear projection of your company’s long-term performance. If there is any uncertainty, you can breach the possibility of financial ruin.

The market is characterized by its ever-changing nature. Therefore, any large purchase should be executed with caution. If your organization does not have the finances to support a purchase (and then some), it may be too risky a move.

Not only do you have to pay for the property, but you have to front costs associated with appraisals, loans, repairs, and many other factors. It may not be worth it, especially for organizations that operate in uncertain or quickly-changing markets. Any rapidly evolving industry may initially want to avoid significant purchases that will seal them into a twenty or thirty-year debt.

Less Flexibility

For the price of buying a property to be worth it, your organization has to feel comfortable occupying the space for twenty to thirty years. And how much does the market change in twenty to thirty years?

It can be impossible to project your company’s growth to those extents. Picture the landscape of industry in the nineties. We are dealing with an entirely different market with entirely different demands, technology, and consumers. If your organization does not have the capital to cut and run if need be, then it may not be wise to purchase.

If you are set in a specific location, you have less room to adapt to the market. Think about the current work from home movement. Business owners are saving huge sums of capital on physical space as their employees get the job done from their own homes. And who could have predicted this as a reality even five years ago?

We are in the midst of a mass-disrupter event. COVID-19 and its influence have changed how we conceptualize work as a society. Tying yourself to property ownership makes you more vulnerable to being on the wrong side of this disruption.

Buying a property means missing out on possible opportunities to capitalize on changing industry. A company’s ability to match the ebbs and flows of the marketplace is often its most vital asset.

You also have less geographic flexibility. You are stuck in a specific spot. That means if taxation or property costs of that area skyrocket, you have no freedom to move. You cannot adjust to meet new talent pools or evolve to match the changing market.

Responsibility

Putting yourself in an ownership role means that you will inherit all of the landlord's headaches. Whether this means dealing directly with operational costs, maintenance, or disasters- you are responsible. Leasing a space gives you more time to consider your company's needs rather than building upkeep and other logistical factors that may be associated with running a corporate space.

If you seek to lease out space to other tenants, you also have the burden of doing business with them and any of their needs that may surface. You are on the hook for finding and maintaining reliable, credit-worthy tenants. In addition, you have to preserve the space that they occupy. You become responsible for any and all expenses, including facilities, construction, taxes, upkeep, missed payments from tenants, etc.

If the market or your company do not perform as expected, you are culpable for still paying mortgage payments on the space. What was initially considered a wise financial asset can quickly devolve into a money pit.

What Now?

With a more thorough understanding of the pros and cons of buying space, you probably have a better idea of the next steps you want to focus on.

If you want to pursue buying a space and need a helping hand, tenant representatives can be there for you throughout every stage of the process. Their expertise can find you the optimal location with the best terms and most potential savings.

If you decide that buying a property does not match your organization's needs, you have other options. Leasing is perhaps the most efficient way to adapt to the market while keeping an eye on your company’s growth.

Either way, tenant representatives can help you from making decisions to finding viable properties, and finally negotiating on your behalf.