With market conditions so favorable, most owners have decided to hang on and watch their property values keep moving higher. But a hold-forever strategy may not be the right thing for everyone. In this post, we discuss options for owner-users approaching retirement.
To be sure, today’s industrial property owners are in an enviable position.
The owner-user real estate model has been thriving for decades. Business owners looking to control their occupancy and build their own real estate portfolios have done quite well through the years.
A colleague of ours recently told us that he sold his first industrial building in Anaheim to a user back in 1978 for a whopping $27 per square foot. That same building today, which is still in good condition by the way, is worth approximately $275 per square foot. Even after adjusting for inflation, the return on the buyer’s original 20% down payment was nothing short of astronomical.
There are literally thousands of owner-user success stories like that one, but you don’t have to have purchased a property in the 1970’s to make the list. Those who purchased their industrial properties as recently as 2011 have seen their property’s value more than double. And prices are way ahead of the previous market peak and still moving higher in what is now the longest bull market in US history in both commercial real estate and the US economy.
That means even those whose property value fell by 40% or more during the Great Recession have seen their paper losses turn into handsome potential gains, which makes quite a case for the benefits of a long term perspective.
That said, the length of the current up-cycle is a growing concern for those who are sitting on piles of unrealized equity and are nearing retirement age. Even though market metrics still look solid going forward, it makes good sense to at least consider taking some chips off the table. We talk to owner users every day who like the idea of riding off into the sunset with a huge bankroll, but refuse to do so because they are either tax averse or don’t know what else to do with the money if they cashed out.
Many of them decide to lease their buildings out for income, which at today’s lease rates can be a good option. But, holding the property entails leasing risk like vacancy, tenant default, management problems, deferred maintenance costs and functional obsolescence, along with the risk of a market pricing correction.
Other owner users may be ready to access their equity by selling, but still want to operate their business without moving. A sale-leaseback transaction with a third-party investor is a good option in these circumstances. The owner user eliminates the risk of ongoing ownership, but continues to operate his business in a property that suits his needs. For the more tax averse owners, they can trade into another income property, presumably with a risk profile that reflects their retirement plan.
It costs nothing to stay informed, but it could be very expensive if you don’t. If you are an owner user planning for your years of well-deserved retirement, we welcome the opportunity to share how others in your position are doing the same. Just give us a call. We are here to help.