Business Owners are asking "Rent or Own"

Many of those professional service business owners lease their office space. While that makes sense for some, a great many are starting to see the opportunities that ownership provides. With the amount of inventory available, property valuations make more sense today than at any time in the past 5-7 years. Capitalization rates (or expected rate of return on a property) have moved back up to sustainable levels, which means prices have come down.

We are seeing cap rates between 7 8.5%, depending on the quality of the building and its location. Just a couple of years back, cap rates were a couple of points lower.

In fact, prices are at a place where, in many cases, it is less expensive to own than lease. A business always pays for space, whether rent payments or loan and property tax payments. In almost any environment, payments on a loan offer the ability to build wealth that rent payments simply do not afford. In todays climate the opportunities are even more substantial.

We have many clients that sell their businesses at the end of a successful career. When a business owner sells his or her business, the value of the real estate, in most cases, greatly outweighs the going concern value.

And in the current banking environment, owner-occupants hold a particularly favorable position in the eyes of lenders. Much of the media attention on banks troubled assets refers to speculative land development loans. Many banks became overly concentrated in those loan types and are now steering clear of those deals. By contrast, the building owner who occupies his or her own space is seen as less risky. Therefore, most banks are looking to make loans to existing businesses that have a good track record.

It is not just the availability of loans that is attractive. The loan terms also help the business owner take advantage of todays climate. Interest rates are quite low and there are great loan programs to help reduce one of the biggest barriers to ownership down payment. Small Business Administration backed loans, for example, offer as little as 10% down.

Another reason so many business owners are jumping on buying their own spaces is the emergence of commercial condominiums. Until recently, a small business owner had fewer choices for purchasing his or her own 2,000 square feet, such as a dentist, doctor, attorney or engineer, often located in a larger professional building. The prospect of buying the entire building, only to occupy a fraction of the space, was too much for some to consider.
Now building developers are building new or converting existing buildings into condos so that smaller units within a larger building can be separately purchased. This has greatly expanded the availability of properties for buyers.