That is the question, as asking prices for real estate sink along with rents
By H. LEE MURPHY / Crain’s Chicago Business / October 25, 2010
When the recession hit, Jay Goltz took a long look at his various businesses, ranging from picture framing to garden furniture. Operating costs were rising. Real estate, he soon decided, was the main culprit.
Goltz Group had operated in various buildings along Chicago’s Clybourn and Elston avenues that were both leased and wholly owned, with costs zooming as the surrounding neighborhood gentrified. He had started out paying $1 a square foot to rent a small space on Cly- bourn in the 1980s and saw his leases climb to $4 and then $6 and finally $10 a square foot as groceries and gift shops took over surrounding warehouses. Property taxes tripled at another Goltz location on Elston and Webster Street after a Kohl’s moved in across the street on what had been an empty lot.
Hoping to put a clamp on his real estate costs, Mr. Goltz last summer paid a little over $2 million for an aged, 85,000-square-foot industrial building at 701 N. Albany St. in what is still a factory district. He reduced his overall occupancy costs from an average $10 a square foot to about $3, taxes included, he calculates. Real estate once equaled nearly 10% of his $13 million in annual sales. Today it’s closer to 7%.
“Buying my own building has turned out to be very affordable for me,” Mr. Goltz, 54, says. “With my real estate costs down, I can be much more competitive in the marketplace while holding onto my profit margins.”
The answer to the age-old commercial real estate question “Should I rent or buy?” rarely presents such a black-and-white resolution. Mr. Goltz acquired his plant, an 1880s structure where cast-iron stoves were made, at nearly half the price it would have fetched a few years ago. Asset prices have fallen all over the Chicago area, making purchasing an attractive option.
On the other hand, lease prices are down, too, and with the economy still in the doldrums many business owners are reluctant to try to forecast their space needs five or 10 years into the future. Many would find mortgages difficult to finance anyway. For these businesses, leasing is still the best option.
“Strictly looking at the cost of mortgages and the prices of buildings, this is a favorable time to be purchasing real estate,” says Jeff Liljeberg, a managing director at Jones Lang LaSalle Inc. in Chicago. “But many businesses are looking at the bigger picture. They want to be flexible in the space they put their people in. They also want to be able to exit a space down the road if their needs change.”
Leases do look cheap now. Around O’Hare International Airport, industrial buildings that were renting on a net basis at $7 to $9 a square foot three years ago are now available for as little as $5, says Keith Stauber, another Jones Lang managing director who works in the suburbs. He says there is no consensus on the buying vs. leasing.
“Lease prices are very low for companies doing simple warehousing. But heavy manufacturers who are likely to need more specialized facilities are also finding that asset prices are down 10% and more off their highs,” Mr. Stauber says. “Tenants with lots of cash and a strong balance sheet will be tempted to buy. Companies that are growing and expanding may see more advantage in investing cash in machinery and people, and not real estate.”
BUILD TO SUIT
When Astellas Pharma US Inc. began to run out of space at its leased 300,000-square-foot North American headquarters in Deerfield after a major acquisition, management started looking for another building to rent. Things quickly got complicated.
“We wanted a place along an expressway where we could raise our public profile with a sign and also offer easy commuting for our 900 local employees,” says Collette Taylor, senior vice-president of human resources and corporate administration at Astellas. “We also needed a place with convenient expansion opportunities. We were in a building where we had grown over the years and people were stuck in odd pockets of office space that weren’t contiguous.”
Astellas could not find exactly what it wanted, despite an office vacancy rate exceeding 27% in the northern suburbs. So the company, whose parent is based in Tokyo, is building two towers encompassing 425,000 square feet on eight acres that were once the site of the Culligan International Co. headquarters. Construction, at a cost of $150 million, started in June and the buildings will be ready for occupancy by spring 2012.
Even smaller companies are opting to own their buildings. Jayant Shah, CEO of RPT Toner LLC in Bensenville, which reconditions printer toners, recently decided to leave a leased warehouse for a nearby 50,000-square-foot vacant building that he acquired for $2.75 million. The company plans to move by December.
“I wanted to own. It feels good to own. It allows me to build equity,” Mr. Shah says.
He started the company four years ago with a handful of employees in a 2,500-square-foot space and eventually moved up to the 23,000-square-foot one he will give up in a few months.
“We had 30 employees a year ago and now we have 55. A year from now we hope to have 100,” says Mr. Shah, who is getting an 80% mortgage from a local bank to finance his acquisition. “The new place we’re buying has the capacity for a workforce of 150. So I think it will allow us to keep growing for a while yet.”
Dimitrios “Jimmy” Bousis, owner of Cicero-based Cermak Produce Inc., operates nine stores, the majority in buildings he owns. He opened a 30,000-square-foot store in June at Cicero Avenue and 72nd Street in a former Wickes Furniture outlet that he bought for $4.4 million, financing the purchase with a 3.9% mortgage from J. P. Morgan Chase & Co.
“The mortgage terms on that purchase are the best ever for me. I used to pay 6% on loans from Chase three years ago,” Mr. Bousis says.
And yet his biggest store, 90,000 square feet in a former Kmart in Aurora, is leased. The rent is $2 a square foot, plus another $1.25 a foot in property taxes. “You can’t get warehouse space that cheap, so why buy it?”
This article reprinted with the express permission of Reis, Inc. a commercial real estate reporting service. Copyright 2010 Crain Communication/All Rights Reserved.