Does it pay to continue leasing space, or should you take the plunge and purchase a building?
It’s a choice many business owners will have to weigh at some point. And today, with inventory tight and demand high, owners may not be able to sit on that decision for long.
“Right now it’s a very tight market, and there’s not a lot of buildings to choose from,” says Ralph Perna, executive managing director in the Melville office of Newmark Knight Frank, a commercial real estate services firm.
The Long Island industrial market reported a vacancy rate of 3.1 percent in the first quarter, down slightly from 3.2 percent a year ago, and lower than the 5.3 percent national average, according to data from Newmark Knight Frank.
For the Long Island office market, the vacancy rate was 8.9 percent, up slightly from 8.7 percent a year ago but still substantially lower than the 13.5 percent national average, the company reported.
Contributing to demand is interest from companies in the boroughs looking to relocate to Long Island, where asking prices are a bit more attractive, Perna says.
Also, over the years, the boroughs have rezoned many areas from industrial to residential, says Michael Freedberg, president of West Babylon-based Suffolk Industrial Properties, a commercial real estate brokerage.
For instance, many neighborhoods in Long Island City, once industrial, have been replaced with luxury high-rise apartment buildings, which has only increased demand on Long Island, he says.
“If you’re planning on doing something, you’ve got to be quick because in this market the buildings are staying on the market for a very short time,” says Freedberg.
But you must do your homework, says Perna, noting “buyers have to become educated.”
First, make sure you’re buying in an area that isn’t on a downward value trajectory, says Brian Hennessey, senior vice president in the Los Angeles office of Avison Young, a commercial real estate services firm, and author of “The Due Diligence Handbook for Commercial Real Estate” (CreateSpace; $19.95).
Second, make sure you’re not overpaying for a property by checking market comparables. And make sure that you — and the property — qualify for a loan, he says.
An SBA loan can be beneficial because you can put as little as 10 percent cash down, versus 25 percent to 30 percent down for a conventional loan, says Hennessey.
An SBA 504 loan can be used for both the purchase of commercial real estate and fixed assets, says Jim Goldrick, regional president for Long Island and the New York metro area for the New York Business Development Corp. and The 504 Company, which has offices in Melville and Manhattan.
The 504 Company is one of the certified development companies authorized by the SBA to provide the 504 program regionally.
An added benefit of the program: Rates are always fixed for the duration of the loan, which can be 10, 20 or 25 years, says Goldrick, noting that the strong economy and anticipation of rising interest rates are both driving the market.
“It’s an extremely hot owner/user market right now because of the ease of getting SBA loans at historically low favorable rates,” says Hennessey, who is also founder of ImpactCoachingSystems.com, an online resource for real estate investors.
When it comes time to purchase, choosing the amount of square footage can be tricky. It should be based on your historical growth rate and projections on where you want to be, he says.
Richard Teed, president of LBi Software Inc., a provider of custom sports analytics software and HR help-desk software, gave his company room for growth. He purchased a 25,000-square-foot building in Melville last year but only occupies 16,000 square feet for now, leasing the third floor to tenants.
LBi has 55 employees, with room for up to 70. The firm had been leasing for 20 years but decided it was time to buy.
“We’re in a growth position and have grown for the last 10 years,” Teed says.
Of companies making capital expenditures:
39% bought equipment
16% upgraded or expanded facilities
8% bought buildings or land
Source: March survey by the National Federation of Independent Business