From Tenants To Landlords | Manufacturers seize opportunity to buy instead of rent
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Rich Herlihy, executive vice president at Richards Barry Joyce & Partners in Boston.
A down economy is a good time to hear talk about the present being a an opportune time to buy, and not just when it comes to residential property.
The same “why rent when you could own” pitch applies to commercial property users, as well as residential buyers. Real estate attorneys and commercial brokers have predicted in recent weeks that an increase in commercial property buys by businesses that heretofore have leased is on the horizon.
But the trend will have less to do with price than it does with opportunity, say executives in the field.
“In the early 90s there was a ton of property for sale. In the early 2000s, a lot of tenants started to think about buying stuff, but typically it’s more talk than actual transactions,” said Richard Herlihy, executive vice president at Boston commercial real estate broker Richards Barry Joyce & Partners.
One exception might be small, privately-owned manufacturing companies that Herlihy said could “take the opportunity to pick off empty buildings.”
“We’re going to see more vacant flex buildings and more vacant small industrial buildings,” he said.
And a manufacturer that intends to buy and occupy one of those buildings not only has a good chance of getting a bargain price in the current market, but a better chance of getting financing than an investor dependent upon tenants to make the property work.
That situation could put a user in a position to outbid an investor for a building.
“A company in good fiscal shape can get debt to finance a building if it’s going to occupy a building,” Herlihy said.
Limiting Growth
Mark L. Donahue, president of the Worcester law firm of Fletcher, Tilton & Whipple, said the firm has seen tenants moving toward owning property. Donahue has worked in real estate law for more than 20 years.
Most of the activity Donahue is seeing in his practice is from tenants that need more space, he said. They are taking advantage of low interest rates and a soft real estate market.
And those buyers may not even need the additional space right away, he said.
“People are using the opportunity to prepare for growth in the future.
Prices are low, rates are low, they see it as a good time, even if they don’t have the immediate need,” he said. “Particularly for companies that are going to be users, the marketplace is very competitive for lending.”
That’s the situation Component Sources International found itself in. Until the company bought a 27,000-square-foot building in Westborough for $2.25 million in March, it leased space, most recently in Southborough.
“We had been looking to buy our own building for about five years,” said Stephen Doody, the company’s owner and president. “To be a manufacturer and lease space, it limits growth, especially if you’re surrounded” by other tenants.
Doody said buying 121 Flanders Rd. in Westborough didn’t present a fantastic bargain compared to leasing space. In fact, “it’s break-even for us,” he said.
But the company is now building equity and actually has a little extra space in its new building for future expansion.
Hope To Make It
A company that makes money and pays rent is attractive to lenders, Donohue said.
“It’s better than counting on someone who’s going to rent to someone else you’re going to hope is going to make it,” he said.
And for investors and large, corporate property owners, “the trend has gone away from owning,” Herlihy said, in order to get properties off their balance sheets.
It’s becoming more common for tenants, instead of renewing a lease, to ask property owners for quotes to buy.
Tenancy adds value to a building. And in an economy like this, it may make more sense for a landlord that’s in negotiations with a tenant to extend a lease to entertain the notion of selling the building to that tenant rather than risk having an empty, or even partly empty, building on his hands.
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