It’s no secret that running a business is full of choices. From deciding on the product to sell or service you wish to provide, whom you employ to deliver the finished product you face a choice and what comes with that choice is an opportunity cost. The one thing you can count on for your business however is that you will need a premises to run it from. The biggest dilemma you face as a commercial real estate user is whether you are better off to buy the premises for your business and become your own landlord, or to lease one and become a tenant. The outcome of this decision is extremely circumstantial and heavily reliant on aspects of your business such as growth, financial position and strategic locations, as well as working within the constraints of the property market which is driven by fundamental economic principles.
In the article below, you will find arguments to make the case either way for owning or leasing, at which stage of your business timeline each option may be more applicable and how market fundamentals may impact your decisions.
Financial Position – The biggest influence for all end users of commercial real estate is money, with the core of this being the ability of your business to service a mortgage as well as the operational costs of your business plays a pivotal role in your decision to lease or purchase your premises.
Start-up companies face financial uncertainty throughout the initial growth years which impacts their ability to borrow funds from lenders in order to purchase their own premises. There is no need to hit the panic button however, as the benefit of leasing your first, second and maybe even third premises is the added flexibility which allows you to pair the growth of your space requirements with the growth of your business, and to avoid sunk costs in the form of poorly utilised space. Once some of your initial capital outlay has been repaid, you appear as a less risky borrower in the eyes of financial lenders, allowing you to purchase the perfect premises for your mature business!
Strategic Positioning – Location, location, location. The age old adage is alive and well in the sense that the positioning of your business has a massive impact on its bottom line and sustainability. Surrounding yourself with key cliental, suppliers and distributors has profound effects on the reduction of transportation and logistical running costs and as a result can influence whether you are willing to forgo the benefits of owning your own premises and opt for a lease instead. This of course is driven largely by factors outside of one’s control, as readiness of supply in your preferred areas is never a guarantee and purchasing a property or leasing on the periphery of your desired location can hamstring your business. If you are tied into a commitment, whether it be servicing a mortgage or a lease, quite often you are unable to up and move to a spot where your business will flourish once supply is available.
Growth Anticipation – From the day your brain child becomes an operational business, you will need a premises from which to run it from. Starting out small is inevitable, however every business goes through different surges of growth at different stages. Buying a premises can seem unfeasible if in 12-24 months you will grow out of it and as a result have to relocate. Leasing is most certainly the more common option for start-up businesses, especially those crafted by younger generations who are new to the business world and running their own shop. This isn’t always the case however, if you do have the means to purchase your first premises it can act as a fantastic foothold into the commercial property market, as once you have outgrown your premises you can purchase your next by leveraging off your initial asset, which is now rented out and providing a comfortable supplementary income.
Economic Constraints – Of course, all of the above is constrained by the fundamental economic concept of supply and demand. Property is cyclical in nature and follows a typical boom/bust model of which demand and supply are the key facilitators. At times where interest rates are low and borrowing comes cheaply, demand for commercial real estate stiffens, yields shorten and prices sky rocket. Those start-up businesses looking to take full advantage of a buoyant economy are quickly priced out of the market by heavy hitters in the form of institutions and overseas buyers who consume large amounts of sale stock, leaving leasing as their only affordable option. Conversely, once the market takes a turn and heads south towards a ‘bust, those businesses who previously were priced out of the market can now afford to buy back in once the quick-fire sales start to appear from those owners who can no longer afford to service their mortgage, or were too highly geared once the market began to turn.
Aidan Moss – West Auckland Commercial Broker
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