Commercial real estate -- as any entrepreneur looking to buy property knows -- is on a tear. Average prices for industrial properties rose 21% in 2004, according to Real Capital Analytics, a New York research firm. Office buildings and retail properties got more expensive, too, gaining 6% and 14%, respectively. In the first half of 2005, smaller industrial units rose an additional 10%.
Sure, buying real estate for your business has plenty of advantages, from tax deductions to potential price appreciation. But do sky-high prices make buying now a sucker's bet?
Not necessarily. These price increases come on the heels of an extended slump: costs of smaller industrial properties were flat from 2001 to 2003. Price spikes have been largely confined to hot cities like San Francisco and Washington, where institutional investors have been buying property. "There's no evidence of a bubble in commercial real estate," says Dan Fasulo, director of market analysis for Real Capital Analytics. "As long as the economy keeps moving, things should be fine."
The best advice, says Robert Bach, director of market analysis for real estate consultants Grubb & Ellis in Northbrook, Ill., "is to focus on your business and not look at real estate as a sideline play to make more money." Certainly, low interest rates make purchasing attractive. But if your company is growing fast and you buy a property now, you may soon outgrow it and have to sell. You'll be saddled with transaction costs, and if the market does dip, you could lose money.
That's why James Woodrow, co-owner of Las Vegas-based Preferred Public Relations & Marketing, kept growth in mind as he started to shop for property. He bought a 5,000 square-foot office building last year. Woodrow replaced his monthly rent of $1,500 with a $7,500 monthly mortgage payment. Still, he says, "It's the best thing we could have done." He's renting out 40% of the building for $4,500 a month, and his $1 million, 14-person company will significantly lower its taxes by writing off depreciation on the building and interest on the loan.
Whether or not you should try to do the same depends on your business and your local market. The risk of falling prices is highest in hot markets such as coastal California, Southern Florida, and the New York metro area. Among the cities with the lowest prices per square foot are Austin, Tex., Cleveland, Baltimore, and Atlanta. You can keep up with local prices by browsing local brokers' listings and www.loopnet.com, which lists commercial properties for sale nationwide. Grubb & Ellis offers some free information on 35 industrial markets and 50 office markets on www.grubb-ellis.com. Detailed reports run $150.
If you own property that has appreciated but don't want to move, consider cashing out some profits with a sale-leaseback. That's when you sell your property to an investor, then rent the same space back at a preferred rate. Of course, you'll lose the tax benefits of owning, but you'll pocket any gains from the sale. And those could pay the rent for quite a while.
By Chris Taylor