If
you attended last week’s column - you learned the two main ways to avoid a
rental rate increase - know your owner and understand the value of your
tenancy. If the bottom of your birdcage housed the Real Estate section prior to
consumption - here is a brief recap.
Industrial
lease rates have increased a whopping 134% over the past ten years. Recall, our
market for manufacturing and logistics space was awakening from the ether of
the 2008-2010 financial reset - errr meltdown and they’re were bargains galore.
Now with the classic increase in demand from pandemic fueled buying and a
pinched supply of available buildings - rates have skyrocketed! But, you may be
fortunate to rent from an owner that appreciates your worth as a tenant and
wants to avoid a costly vacancy if you bolt. If this is your situation and
you’re approaching a renewal - count yourself among the lucky. Conversely, if
maximizing the monthly income is your landlord’s objective - you could face an
increase of double what you’re currently paying.
But,
there is hope. Please keep in mind these three strategies to stem that spike in
your monthly payments.
Buy a building. Historically, purchasing has been
costlier than renting on a pure monthly outlay basis. Meaning - if we stack a
mortgage, allotment for property taxes, insurance and upkeep together - the
total will be higher than most leases. Plus, you must come up with a sum to
bridge the gap of what a bank will loan and your purchase price - 10-25%.
However, this is many times shortsighted when looking at a projection over the
life of a company’s occupancy. You see, lease rates escalate over time -
generally fixed at 3-3.5% annually. And, when a term expires, your landlord
will bump the number even higher to compensate for the market variance.
Currently, we’re seeing a huge boost in rental rates which eclipses that 3-3.5%
annual escalator. Some find it better to own, finance the buy with fixed debt -
thus stabilizing “rent”, enjoying appreciation and the tax benefits that
accrue. A word of caution. If you enter the buying fray - be prepared.
Structure your A-game with proof of your down payment, lender pre-qualification
letter, and a well reasoned story of your desire to purchase.
Move to a cheaper geography. Once, the
Inland parts of SoCal were cheaper, newer, and alternatives were plentiful. If
you’re a logistics provider and you look East - this affordability gap is
quickly narrowing. However, there are still “deals” to be found. Don’t forget
areas just outside the state borders - such as Arizona and Nevada. You might
even find a business climate that welcomes enterprise with goodies - tax
breaks, employment incentives, and fewer regulations.
Do more with less. We toured an operation recently.
Occupied was a big chunk of a larger address. Since they leased the space five
years ago, several distribution centers had been added to their supply chain
thus lessening their need for the square footage they leased locally. By
trimming their premises by 40% - a great building popped up which fit their
requirement. Another client of ours took advantage of the relative softness in
the office space market and peeled away that portion of the company.
Eliminating the people component from their warehouse created several new
buildings to consider. Don’t forget. Your additional capacity might be found if
you look up and maximize your stacking. Frequently, a group will believe they
are out of space because their floor is consumed. Ignored is the two or three
feet in height not used. With the advances of material handling equipment - you
can literally use every inch if you narrow your aisles and pile your product
high.
More
on these later.
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