The nationwide real estate boom has reached a fever pace since the beginning of 2020. Across the country, housing prices are up more than 15% since last spring, driven by a variety of factors and new working trends. While the commercial real estate market has been hampered in the short term by the work-from-home movement, commercial and industrial real estate prices have been in a steadfast period of growth over the past ten years. If your business is growing, that makes now a great time to explore purchasing commercial real estate.
Industrial real estate, in particular, has experienced strong growth driven by the need for logistical space for e-commerce and technology companies. As an entrepreneur, your main job is to turn an operating profit on the goods and services you sell; but you can also gain many operational advantages out of owning your own space, and a secondary pathway to building wealth through your business.
How the commercial real estate boom affects business owners
When a boom happens in the commercial real estate market it has the potential to harm renters and benefit property owners. If your business rents its space, you could face spikes in rent as your lease renews and a growing share of the space’s rent goes to real estate taxes. Commercial rents have managed to grow at a rate over 5% per year for the past 10 years across New York State.
In contrast, if your business owns its own commercial real estate, you can enjoy stable occupancy costs during a boom, and capital gains that come from your property becoming more valuable. Imaging being able to make the same monthly payment every month for the next 10 to 25 years!
The benefits of owning your own commercial real estate
When your business owns commercial real estate and uses all or most of that space to operate, you’ll enjoy many benefits that tenant businesses do not have.
First, real estate is a long-term asset that generally grows in value. For that reason, lenders will provide financing for that real estate on long term schedules with smaller monthly payments. This means that in almost all cases, the monthly cost to own real estate is significantly less than the cost to rent a similar sized space.
Second, as a property owner you have more options to help you ease the cost of having your property. Many entrepreneurs will sublet a portion of the space that they don’t need to offset some of these costs.
Third, owning real estate means that you can do whatever you want with that space, as long as it’s in line with community and legal requirements. A landlord will have a say in just about every modification you make to your space and place restrictions on the type of business you can conduct there. Owning your space means you can make many more modifications to the space and changes to the business model that meet your needs.
Finally, in the very-long-term, you’ll build equity in a fixed asset. Owning your own commercial real estate means that in addition to the profits your business makes over the years, you’ll also have built-up equity in your property that you can cash out in a sale or use to finance an additional business expansion.
Why the down payment matters on a commercial real estate loan
The down payment, or how much cash your business will be putting towards buying its property, is key to this conversation. Many entrepreneurs know that owning their own commercial real estate provides stable occupancy costs, but coming up with the down payment just isn’t a real option for them.
The down payment can be a barrier to entry for owning a commercial property, but it also provides protection if prices fall. Just as there are real estate booms, there are sure to be real estate busts in the future. A down payment is the money that is used up when the price of real estate falls, thus protecting you from being underwater, or having a mortgage worth more than the property, and being unable to resell it.
Luckily, there are a few options available that can help you get passed the down payment barrier. One is the SBA 504 loan program. This government-backed loan program is specifically designed for businesses that will occupy the majority of a property to conduct business and generally plan to stay there a long time. The benefits of this program include lower, more stable interest rates, a 25-year term on the 504 portion of the loan, and a down payment as low as 10%.
A recent trend during this boom cycle among real estate lenders has been to accept lower down payments (although there are few as low as those offered by the 504 program).
Recent opportunities in the commercial real estate market:
A few opportunities have come up in the past 12 months that might be an option for your business:
- Manufacturing deurbanization: Historically, what has tied businesses to the biggest cities has been the concentration of a specialized workforce. During the pandemic, many people’s attitudes about living inside major cities has shifted and these workers have spread out. Businesses that relied on being located inside the city where they do the most of their sales are now looking to expand to larger, more affordable production spaces outside of major cities while leaving their sales teams behind to attract clients.
- Commercial spaces in central business districts: In major business districts such as Midtown Manhattan, commercial real estate prices dropped sharply during the crisis and are only now starting to recover. These spaces were largely unaffordable to small business owners in the past, but may be an opportunity for purchasing now – locking in lower occupancy costs.
- Commercial real estate for logistics: Online sales and deliveries have become ever-more important this past year, and many businesses are seeking spaces that fit the need for warehouses to support fulfillment and logistics.
What matters most:
We’ve been through real estate booms before, and as history has shown price rallies always come to an end. For this reason, you should think first about the needs of your business operation and then see if the current circumstances could afford some opportunities for you to save money on rent or build a strategic advantage for your business.
If you are ready to purchase commercial real estate, the SBA 504 loan program may be a great option for you and your business. Get in touch with us today to learn more about the process and what you’ll need to get started.