Office space that is designed to meet your team’s needs contributes immensely to the steady growth of your business along with employee productivity and satisfaction. As you search for this perfect space, you may wonder about the benefits of leasing versus buying office space. One major factor is time—how long do you plan on staying in that building? The other important influence on your decision is the budget and your business’s growth. Along with these considerations, we also examine below some of the other elements that affect your decision.
Pros of Buying Office Space
If you have extra space that’s sitting empty, you can rent it out to gain additional income. This not only provides supplemental income for unutilized space but flexibility around the growth of your business. Extra space can be leased to an outside tenant for a few years until your business is ready to take on a larger space, but when it is you’ll have something readily available to grow into at the end of the tenant’s lease term.
No Annual Escalation in Cost
When leasing space, landlords usually expect annual escalations to the rent rate, which in today’s market is anywhere from 2-4%. Though these are often backed into the lease agreement and known in advance, it is an escalating cost on an annual basis. When owning a property, at least during each mortgage term, mortgage payments are generally fixed, which provides a fixed and static cost for several years at a time.
Offers Maximum Flexibility for Improvements
Property ownership comes with the perk of being able to repurpose in any manner you’d like (within city codes) without having to obtain approval from a landlord, and while fully benefitting from any increase in asset value as a result of the upgrades.
In many cases, you can claim expenses to realize tax advantages with an owned property, often related to interest payments and depreciation along with other building-related expenses.
Increasing Property Value
An owned property becomes an asset for a business, as opposed to a lease agreement which acts strictly as a liability. As such, as the property appreciates in value over time, it can provide tremendous benefit to the owner. In some cases, business owners who own property for the purposes of their business end up managing those properties in retirement and benefit from the rent income and significant value appreciation they may have realized over time.
Cons of Buying Office Space
Buying a property requires significant upfront capital for the down payment in addition to closing costs and other transaction-related costs.
Businesses may grow or shrink over time, sometimes in unexpected ways. With leases, there is less financial commitment and often more nimble options associated with the space you occupy. When a property is owned, however, if the space no longer works for your business for whatever reason, the property will either have to be sold or repurposed, which is not always the simplest or quickest process.
Long-Term Expenses and Time Investment
Of course, if you own the space or building, you’ll have to bear the cost of property insurance, all maintenance and repairs, utilities, and property taxes. Over time, as buildings age, these types of expenses can increase materially as the extent of maintenance and repair projects grow. Regarding the execution of repairs and maintenance, there can also be a significant time commitment in meeting with property managers and contractors.
Pros of Leasing Office Space
More Liquidity and Access to Capital
Without the added expenses of ownership, businesses can hold onto capital that otherwise would have been used in down payment and deploy it in other ways to grow the business.
The property’s owner bears the responsibility of paying for major repairs and maintenance along with securing the contracts to do so. These costs are often passed down to tenants in the form of TMI increases, but the full responsibility of worrying about and executing these repairs falls on the landlord, which is one less accountability for the tenant to worry about.
Access to prime properties
When working with a real estate agent to secure office space for lease, because of the lower upfront capital commitment your business may be able to afford a higher-end or more sought-after space as opposed to settling for a lower-tier space due to cost constraints when buying.
Cons of Leasing Office Space
Rent Increase Over Time
In addition to the annual escalation factor negotiated into lease agreements, tenants will also be subject to market rates at the time of lease renewal. If the market rates have increased substantially (as we’re seeing in the industrial market over the last several years), then tenants will be in for some sticker shock on a lease rate that could be significantly more than what they had been paying to that point.
No Asset Appreciation
As mentioned previously, property ownership provides the full benefit of value appreciation if that asset class goes up in value. On the other hand, leasing provides none of this value, and in fact, will likely result in increased lease rates at renewal if the asset class has appreciated.
Changes in Property Ownership
Like any lease situation, you run the risk of the owner selling the property. In turn, the new owner may seek to re-develop or repurpose the space. Though the new owner cannot evict a tenant unless there is a sale/demolition clause in the lease, they may be less favorable to signing a new lease with a tenant at the time of lease expiry. In addition, tenant-landlord relationships are critical for any business that is leasing space, and that relationship must be re-established from scratch whenever there is a change in ownership of the property.
The two most critical factors to consider when evaluating whether to lease or rent an office space are your timeline for occupancy and your budget. If you buy office space, you’re investing in property that you can use to gain extra revenue or to sell later at a profit. With leasing, you don’t have to invest as much capital upfront, and you won’t have to be responsible for repairs and maintenance (though this cost will be passed through in TMI). If you would like to learn more about the pros and cons of leasing versus buying office or industrial space, talk to Joe Rosati. He can offer you up-to-date insight into the market for commercial property and viable options that suit your business.