Three Additional Ways to Avoid Rent Increases

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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.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.