Last week we expressed the importance of a “real estate check-up” to make sure your real estate investment strategy is aligned with the significant changes in market conditions we experienced in 2022.
Until recently, market valuations and rents were headed in one direction-UP, but the weight of inflation, rising interest rates and lingering effects of the pandemic are now pulling in the other direction, just as gravity grips a rocket that runs out of fuel before reaching orbit. That has business owners like you scrambling for ideas on how to maintain profitability under increasingly difficult circumstances.
We don’t know for sure where things are going to end up, but our recent experience tells us that the market is redefining itself. That means we all have to pay attention and put our hands back on the handlebars after coasting along for years. The real estate checkup supports that hands-on approach.
The economic stresses we are all under pose a particularly difficult problem for those running businesses in conjunction with managing their leased or owned real estate assets. Third-party real estate investors are concerned about finding and keeping good tenants, as well as accessing capital at rates that allow them to manage and expand their portfolios successfully. That’s no easy task, but the business owner is first an operator who looks at his real estate, whether it is owned or leased, in terms of his ability to control cost and maintain operational efficiency over time. Since most leases and owner/user acquisitions are long term commitments, keeping them in sync with business conditions that are changing daily can be complex, expensive and risky.
So, if you are a business owner, the real estate checkup is a more complicated process than it is for the owner of a business park, and perhaps even more important because the success of your business has everything to do with operating efficiency. Let’s take a closer look at what we mean by that.
Presumably, you chose your current space for reasons you deemed important to the ongoing growth and success of your business. Location, physical configuration and cost all probably figured into your decision to lease or acquire your facility. You made that decision based on market availability and conditions that were in place at the time, which for some of you out there was 5, 10 or 20+ years ago. And, most likely, your business has changed substantially since then, yet there you are in the same place that has changed little since you moved in. If that rings true for you, you are not alone. While it is true that you can add or remove office, upgrade your power and change the look of a building, the footprint remains the same.
So, as part of your checkup, ask yourself the question: if I had the perfect space for my business today, how would it be different than what I currently have? Would it be in the same location or in an area where lease rates or sales prices are lower? Would it be larger? Smaller? Would the ceiling height be different? Would the sprinkler system be a different calculation? These and other questions speak to operational efficiency, and we recommend that you begin your checkup by walking your space carefully with these questions in mind. Our experience is that doing so will yield surprising results that could put you on a path to operational efficiency that you hadn’t contemplated before.
Let’s say you conclude that your space has become an impediment to your growth and efforts to contain costs in this inflationary environment. What can be done about it? Either you lease your building and have years remaining on your lease, or you own it may not want to sell it now that we appear to have passed the peak in this real estate cycle. You might think you are stuck, but you have several options available to you right now that could put your business on a better footing for success. Here is the first of a few we can share with you to get you thinking:
Lease a more efficient building: Sounds obvious, but most business owners dismiss the idea of moving until their existing lease expires. They think they are stuck. The fact is that lease rates have risen dramatically since you signed your lease. So, you are almost certainly paying under the current market rate and there are other business owners out there willing to pay your landlord more. So, he just might be open to a lease termination once another tenant has been identified. Your solution would be to offer your space for sublease, identify a qualified prospect and then facilitate the negotiation of a new lease directly with the landlord.
While that plan is in motion, you could identify a more efficient space with the higher ceiling clearance, just the right amount of office space and loading doors, which would allow you to reduce your space footprint to reduce cost. Perhaps you could further mitigate cost by adding a new racking system to take advantage of the higher ceiling clearance in your new facility, or buy more machinery now that you have the power you need, but was too expensive to install in your current facility. The list goes on, but you get the picture.
Next week we will share some additional ideas on how you can make your business more profitable by rethinking your strategic real estate plan. Stay tuned.