Dealing with Risk and Market Uncertainty

All of us in the business community must deal with market uncertainty no matter what condition our local, state and national economies are in.

Every business decision we make involves a calculation of risk, and that risk is mitigated by our level of knowledge about the factors most likely to impact profitability.

In a rapidly expanding economy, risk may be minimized by the natural rise in demand for our product or service.

However, our current economy, while in an expansionary point in the cycle, is growing slower than anticipated and well short of the historical norm of a 4% to 6% annual rise in GDP during previous recoveries.

As a result, business owners are more closely scrutinizing all risk factors due to lower expectations for near term growth and profitability.

Looking to the Bottom Line

The decision to buy or lease facilities for business use is no exception. In fact, the cost of facilities is one of the largest line items in the budget for virtually all businesses.

Therefore, even small changes in real estate market conditions can significantly impact the bottom line.

Locally, the rise in sales prices and lease rates is running well ahead of overall economic growth. In fact, sales prices have been increasing more than 10% year for the past several years, while lease rates are currently moving up at around a 5% clip. By contrast, the general economy is only growing about a 2% annual rate.

Post-Recession Costs

When recession hit in 2008, real estate activity dropped precipitously, causing a reduction in property values and lease rates approaching 40%.

Now that the market has clawed nearly all of that back, many local business owners are restructuring their facilities plans by signing longer term leases to stave off further cost increases or purchasing their facilities with fixed rate loans at less than 5% interest, a level not seen since the Eisenhower era.

For these business owners, the reward of lower occupancy cost is worth the risk of looking long term even though the economy is growing in fits and starts.

Whatever your threshold for risk may be in terms of your facilities, having a full understanding of the current conditions and trends is critical to making good and informed decisions. Ready to learn more? Get in touch with us.