Should you make a Long Term Commitment in These Times?

I once authored a column entitled “Worst mistakes occupants make”. Among these are - buying when you should lease, leasing when you should buy, signing a short term lease in a downward trending market, or signing a long term lease in a peak market.
 
To review.
 
Buying. A new, rapidly growing business generally finds a better fit leasing for a term than investing precious operating capital into a static purchase of real estate. Conversely, if the company has been around awhile, is privately owned, has generated a profit for the last two years, has an ownership structure that can benefit from depreciation, and can afford the down payment and debt service - enormous generational wealth can be created by owning the facility from which your enterprise operates.
 
Leasing. When an economic outlook is fuzzy - most operations hedge by making short term lease deals. In fact, much can be gained doing the opposite - think contrarian. While the world zigs - you should zag. But, I have seen companies goof by signing term leases when things are frothy only to see the monthly amount they pay be dramatically greater than current rates - and they’re locked.
 
Most would agree we are in a changing market with respect to industrial real estate. Those occupying retail and office spaces are way ahead of us as their markets morphed years and months ago. With retail it was pre-pandemic and office as a result of the pandemic. But, now here we are with an uncertain future for manufacturing and logistics spaces.
 
So, if you lease an industrial building and you are approaching a renewal - what strategy should you employ? Assuming the space still works for you - location, size, and amenities - feel out your owner. How does she view the current conditions. Is she bullish, bearish, or running for the exits? If she falls into category two or three - she’s probably willing to forego a risky vacancy in favor of constant cash flow. Read - make you a deal! Another idea is the “blend and extend”. We saw a ton of these used in the early 2010’s and they exchange a lesser rate today in exchange for additional years added to the lease term. Both are effective. Just know your owner, know your alternatives, understand your cost to relocate, and finally - be familiar with the cost to replace your tenancy.
 
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.