Whether you’re looking to site your first warehouse or factory or to expand an existing network, it can be difficult to determine whether you should lease the new facility or simply buy it outright. While either method will ultimately get you the new space your business needs, determining which is right for your specific business model can be challenging.
The reality is that there is not a one-size-fits-all answer for making this decision. If you’re trying to determine the next steps for expanding your business, there are multiple factors that will influence the decision process.
Considerations When Deciding to Lease or Buy Your Next Industrial Property
When determining whether to lease or buy your next factory or warehouse, consider the following factors and how they fit into your business model.
Financial Impact
It’s not a secret that buying a property comes with a much more substantial financial burden, but that doesn’t necessarily mean doing so is the wrong decision. While you may need to invest significant capital, you also gain a significant asset in your books that can be used as future collateral, or when determining the total value of your business in the event of a future acquisition or sale.
With that said, not every business has the liquid capital to invest in a down payment. Leasing is a viable option for those who have less cashflow but still need to expand to accommodate growth.
Interest Rates
Interest rates fluctuate widely based on the state of the economy and the health of the industrial market. Buying during a period of higher-than-average interest rates could negatively impact the long-term cost of your facility, while, conversely, lower interest rates might make ownership a far more appealing option. Additionally, securing financing during high-interest periods may prove much more difficult, since the factors that impact interest rates also tend to mean that granting loans comes with higher risk for lenders.
Leasing, on the other hand, may shield you from fluctuating interest rates and allow you to lock in more stable terms through the end of your contract. These fixed costs can be valuable for helping you determine your actual operating costs.
Rental Rates
In markets where competition for industrial properties is fierce, renting can become expensive as landlords adjust rents to match the state of the market at each contract renewal. You may get around this by negotiating a longer lease term at the beginning of your relationship with the landlord to ensure more predictable rent increases.
Direct ownership of your facility means you won’t have to deal with rising rents, but you’ll also be taking on more of the operating and maintenance costs associated with the structure.
Specialized Facility Needs
Some types of industrial operations—think cold storage, advanced manufacturing, or heavily automated warehouses—might require extreme customization. Owning the facility gives you the flexibility for whatever changes you need to make to suit your operation but also leaves you on the hook for the full cost of those upgrades.
Some lease agreements also allow you to make such changes, but the landlord will often own the final product should you choose to vacate the facility at the end of your contract, which means your business might still need to eat the cost of the upgrades. However, if your business model is fairly standard—dry goods storage, retail fulfillment, machine shops, etc.—leasing can give you quick and easy access to a facility without long construction timelines or heavy capital investment.
Scalability/Flexibility
It’s important to think about the future needs of your business. A leasing arrangement means you can scale up or down more readily in response to demand, potentially even allowing you to sublet unused space. When you outgrow your facility, it’s easier to upgrade to a new location without the hassle of selling your property.
Buying can limit your flexibility, so it’s important to decide whether an asset portfolio outweighs the risk of outgrowing your needs. A sale or sublet could happen quickly in this scenario, but it’s also likely that it could take years.
Location and Market Demand
In high-demand locations, buying early can help you secure a foothold in a region while also ensuring the long-term value of your facility will typically trend upward. This could create an opportunity to profit on a sale down the road somewhere.
Renting in these regions almost guarantees regular rent hikes, which can eat into margins over time. Still, the value of being located in such a region may outweigh the rising rent costs.
Maintenance and Control
Leasing usually shifts at least some of the maintenance costs for the facility to the landlord. Tenants may still be responsible for day-to-day expenses, but more structural elements of maintenance will generally fall to the owner. With that said, you may also have less control over improvements or repairs within the facility.
Owning the facility gives you full control over upgrades and repairs but also leaves you responsible for the full cost of those activities.
Consider Your Strategic Goals Before Deciding
Ultimately, the decision to lease or buy comes down to your business model and long-term growth strategy.
“Unfortunately, there’s no shortcut when making this decision,” says Frank P. Crivello, Chairman of Phoenix Investors. “The right path comes down to aligning real estate strategy with business strategy. For some, building equity through ownership will create long-term value that aligns with their growth plans. For others, the flexibility of renting ensures they maintain the agility necessary for future changes. The key is to figure out where your company is heading and choose the option that best supports that journey.”
An experienced industrial real estate broker can help you analyze your business needs and determine the right path forward. If you aren’t sure which path is right for you, please feel free to reach out to Phoenix Investors for help making your decision.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations, and public stakeholders, Phoenix has developed a proven track record of generating superior risk-adjusted returns while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost-efficient solutions, and a reputation for success.
