Improve your bottom line Featured

7:00pm EDT December 26, 2008

With the volatility in today’s commercial real estate market, companies are looking at every aspect of their business to see how they might improve their operating results. With a host of uncertainties due to current economic conditions, revenue, expenses and bottom lines are being scrutinized, and alternatives are being considered to traditional methodology. One option for some is the consideration of owning their real estate versus leasing. As firms look to make strategic decisions today to positively affect future results, this alternative is being looked at more closely.

“With so many questions facing companies today, many are looking at aspects of their business where they can, in fact, exercise some control,” says Rick Narkiewicz, a first vice president and industrial specialist with CB Richard Ellis in Tampa. “One of those line items, and a formidable one at that, is the cost associated with their real estate.

“There are a number of factors that go into owning versus leasing, but without question, it can make sense for some, especially in today’s market. As land, labor and material costs have trended lower, there is a window of opportunity that is certainly worth exploring.”

Smart Business spoke with Narkiewicz about some of the factors that go into considering this option as some firms plan for the future.

What are some of the reasons companies are considering ownership versus leasing?

The reasons will vary depending on the company; however, we have seen some common factors in recent decisions. First, with the desire to run as efficiently as possible a facility that is built to a specific user’s needs is a key step in the right direction. The ability to plan for work force and work flow can greatly enhance productivity. Second, the cost of ownership can be assessed not only for today but can be carried forward to stabilize that important expense line for future planning. For example, lease rates on industrial space have increased approximately 30 percent since 2000. Those who owned their facilities were spared this rapid rise in operating costs. Third, real estate has traditionally been an excellent long-term investment, especially for small to midsized businesses. It is not uncommon for the ownership of the company to hold the property in a trust and lease the facility to his or her company. They are essentially their own best tenant, which is a viable vehicle to build long-term wealth. Finally, there are certain tax benefits that can help make ownership a positive benefit for the company overall.

Are these factors unique to industrial properties?

No, but the industrial sector does have some unique factors that make ownership particularly attractive. Many industrial users utilize heavy equipment that cannot be off-line or can be very difficult to relocate. As such, control over their facility helps ensure a stabile long-term environment. Another factor to consider is the location of the facility, which affects both inbound and outbound movement of product in the course of doing business. Strategic positioning can bring significant cost efficiencies where margins are constantly challenged by increases in transportation, labor and other external factors. Finally, most industrial users fit in a broader scheme of logistical supply so proximity and accessibility to major thoroughfares and rail are essential.

Is financing available for projects in today’s credit restrained market?

This is perhaps one of the real key factors in considering ownership today. Lending criteria has tightened significantly over the past year. This applies not only for possible debt financing but for capital dollars, as well. Subsequently, owners as well as tenants are challenged as they seek to obtain dollars for tenant improvements. However, in the case of a creditworthy, owner-occupied building, we have found the lending sources are available, and at attractive rates in most cases. Here again, costs can be ascertained and planned for over time.

Do you recommend ownership versus leasing?

It all comes down to the needs of the particular client. In some cases, a client’s needs may be such that he or she requires a greater degree of flexibility in needs and therefore feels he or she cannot commit to a more stabilized, long-term scenario today. Some simply may not have the credentials to support such an investment. However, it is well worth the comparative exercise to measure ownership against leasing. Today, it is incumbent to explore all of one’s options before committing. In the end, it’s the bottom line that will help define long-term success.

RICK NARKIEWICZ is a first vice president with CB Richard Ellis specializing in industrial properties. Reach him at (813) 273-8444 or rick.narkiewicz@cbre.com.