Lease Or Buy, Which Is Best For Your Company?

For a corporate headquarters, it may make sense to put down your organization’s roots. If there is any uncertainty, don’t worry. If you know what features you want to prioritize in your real estate endeavors, you will be able to understand whether you should consider buying your commercial space or leasing your commercial space.

As tenant reps, we have spent decades finding our clients the most optimal real estate solutions. Whether this means property ownership or signing a lease, we can help direct corporate professionals to decisions that benefit their portfolio.

So, if you are curious about whether it is the right time to buy or lease a commercial space, read on. We have included the main decision factors that have helped our clients find the best space for their needs.

Buying May Be Cheaper

When confronting a decision as significant as buying a commercial property, all factors must be analyzed extensively. A main factor of consideration should be the average cost.

Real estate is an appreciating asset, albeit an expensive one. As the price of real estate increases throughout the years, so does your equity in the property. In the grand scheme of time and cost, it may be cheaper in the long run for your organization to purchase a commercial property.

Other than the significant initial down payment, your mortgage costs will remain steady. This is entirely different than the experience of leasing. Rent escalations associated with leasing can quickly become extremely expensive. Within a few years, you could be paying exaggerated rates far over the average market value for such a property.

Lease costs are also largely moveable. Depending on building improvements, fluctuating real estate value, inflation, demand, etc., you could be responsible for pinning down these additional costs. When you lease you also forfeit your investment potential. Therefore, any money you put into your space will be lost if you ever choose to vacate.

If you are thinking about entering into a significant long-term lease, it may be more financially sensible to invest in property ownership. There are also certain tools at your disposal that allow you to track differences in total cost. Online calculators will weigh the expense factors of buying vs. leasing against each other to determine where you could save the most.

You can also account for the potential to earn extra income. When you own a space, you could lease out any unused portions to other tenants. While acting as a landlord may become complicated, it can seriously mitigate the expenses associated with property ownership. If you are looking to buy, this could be a powerful move to offset costs.

Tax Breaks

Leasing, especially for the long-term, could be considered a lost opportunity to build equity. Property ownership is associated with multiple tax breaks and benefits that increase your earning potential. This is another reason why in the grand scheme of your company’s overhead, leasing can be more expensive.

Many costs and taxes associated with property ownership can be written off. Commercial mortgage interest payments, depreciation rates, management expenses, etc. may partially be back in your pocket at the end of tax season. Such incentives are another reason to consider the financial implications of leasing versus buying space.

Risk of Disruption When Buying

A company’s ability to adapt to the market is often its strongest asset. When so many factors are moveable, it may not be the most skillful maneuver to tie your organization to a specific location for several decades. U.S. Tax Code considers the life of a commercial property to be 39 years. Is your company prepared to stay in a single space for that time?

The projections for your company’s future performance should be rock solid. However, this feat is often easier said than done. New technology is rapidly evolving, increasing the threat of market disruption. Leasing gives you the power to respond to these natural ebbs and flows.

Consider what the environment of industry looked like 39 years ago. What was cutting-edge technology? CD-ROM. It goes without saying that we are dealing with an entirely different landscape today.

That is why so many companies lease their corporate spaces. Buying a property is your organization's way of attempting to predict the unpredictable.

Keeping Up with The Changing Marketplace

According to Moore’s Law, technological development occurs at an exponential rate. As time goes on, computers and other high-tech gadgets increase in efficiency and decrease in size and price. Essentially, it becomes more widely available to the masses and accepted as a staple within the market. New practices develop, become accepted, and are then replaced by the next cutting-edge piece of technology.

The point is when you take on the burden of property ownership, you are more vulnerable to disrupter events and technology that threaten current business models. When it is impossible to predict how technology will look in five years, how can you confidently lay down roots?

Buying a space puts your organization in a position of higher risk of losing capital and liquidity.

The Ability to Adapt

Disrupter events have forced companies to adapt, however, depending on your services, you always run the risk of being rendered useless by future tech evolution. Property ownership has its benefits, but it does make you vulnerable to being on the wrong side of this disruption.

In a greater sense, the conversation on disruption really points to the amount of flexibility you have when buying or leasing a space. Your adapting power is far greater when you sign a lease. So, if you are looking to prioritize your potential to respond to internal and external cues of performance, leasing is right for your organization.

Varying Definitions of Flexibility

Of course, leasing will give your organization the freedom to be flexible. This power to react to changes in the real estate market, your company’s performance, and regular supply and demand fluctuations, can be invaluable to prolonged success.

Purchasing a property also allows you to be flexible, but through different means. Rather than being free to move, you have freedom to operate the building to your liking. Renovations, operational changes, or any other alterations are up to you. You are not subject to the preferences of your landlord. If you can finetune your space to meet your organization’s needs exactly, why would you even want to leave?

This ability to react to the special demands of your organization within an existing property is critical to sustaining long-term occupancy.

Being the owner will also enable you to make improvements to the space over the term of your stay. So, there will be no point in moving if you have the ability to adapt the space as you go.

Both leasing and buying a space will give you flexibility. However, the type and influence will vary. While leasing will open you more up to adapting to the market and geographic switches, owning will give you the freedom to operate the building as you choose. Both are beneficial to your company’s performance, it just depends on the flexibility your organization wants to prioritize.

Should I Buy or Lease My Commercial Space?

The features your organization wants in commercial space will heavily influence the decision of whether to buy or lease a property. If you are looking for a long-term reduction of costs, buying may be right. It also would be a good decision for any organization that is looking to operate its own space without the intervention of a landlord.

On the other hand, if you want to prioritize freedom within the market and adaptability, leasing would be the right move. It will allow you to operate your business without making a risky, significant decision.

No matter what your decision, tenant reps can help you along the way. If you still need help deciding and weighing out the factors, working with a rep will give you clarity.