When looking for the perfect workplace in New York City, businesses often face a critical question: is buying versus leasing office space the better option?
While both options have advantages and disadvantages, it’s crucial to carefully consider your specific needs before deciding. In addition, because commercial real estate transactions are complex, time-consuming, and have significant economic implications, it’s essential to weigh each option’s pros and cons before deciding.
We’ve compiled a list of key factors to consider when choosing between buying and leasing office space, which will help you make an informed decision that best fits your company’s needs, whether in New York City or elsewhere.
What Factors Influence Buying Versus Leasing Office Space?
An office’s location is one of the most critical factors for a business to consider. Companies must evaluate whether the location is convenient for employees and clients and conducive to their industry and business needs. Furthermore, companies must assess other considerations like proximity to major transportation hubs, safety, and parking.
The cost of buying versus leasing office space can vary significantly. Businesses must consider the upfront costs of purchasing a property, such as down payments and closing costs. They should also consider ongoing ownership costs, such as mortgage payments, property taxes, and maintenance fees. On the other hand, leasing typically involves lower upfront costs. Nevertheless, monthly rental fees can snowball long-term and end up higher than ownership costs.
Business Growth Potential
Buying office space is a good decision if a business wants to establish a long-term presence in a location and if the amount of space it requires remains relatively the same over the long term. A medical tenant is an excellent example of this. On the other hand, leasing provides flexibility for businesses anticipating growth or adapting to changing needs. For instance, how can a business justify applying for a mortgage and making a downpayment of hundreds of thousands or millions of dollars only to relocate in 2-3 years?
Real Estate Market Conditions
Market conditions can influence the decision to buy or lease office space. For example, if property values are high and rents are low, it may make more sense to lease rather than buy. Conversely, buying may be more advantageous if property values are down and rents are high.
Buying may be more attractive than leasing if a business can secure favorable financing terms. For instance, a low-interest rate can reduce the overall cost of the mortgage, making it more affordable. On the other hand, if financing terms are unfavorable or a business struggles to get approval, leasing may be the better choice. Interest rates can vary depending on factors such as the economic climate and the lender’s policies. Moreover, a mortgage’s down payment can range anywhere from 10% to 50% of a property’s value.
Buying Office Space
Before deciding if purchasing office space is right for you, you should evaluate a few things. First, is your business the type that would benefit from buying rather than renting? What commercial inventory is available for purchase, and do you have the budget? Finally, what are the pros and cons?
What Tenants Would Prefer to Buy Rather Than Rent?
- Medical Practices: Medical tenants are the one type of tenant that benefits the most from buying rather than leasing. They want to establish a long-term presence in a location, their space requirements remain relatively the same long term, and they require specialized facilities customized to their needs. Plus, because medical practices have such strong ties to their location, relocating could cause them to lose their clientele. Because there’s a market of medical tenants looking to purchase rather than lease, there is a strong inventory of ground-floor professional space in coops and condos in neighborhoods like the Upper East Side.
- Live/Work Space: An individual who wants to purchase their property and use it for an office and a residence is an excellent example of someone who would buy rather than lease. Some buildings permit this.
- Manufacturing Companies: Manufacturing companies often require specialized facilities and equipment that can be costly to install and maintain. Typically, they will also have predictable space requirements over the long term.
What Type of Commercial Property Is Available for Purchase in New York City?
Tenants in New York City have several options for purchasing commercial real estate. However, it’s important to note that purchasing real estate can be a costly and long-term commitment, and it may take several years to break even. Generally, businesses that prefer to purchase are well-capitalized, established, and have a long-term horizon and predictable space needs. Some of their options include the following:
- Commercial Coops: Coops are commercial properties owned by a cooperative corporation, with ownership shares held by the tenants. Tenants purchase shares in the coop and receive the right to occupy a specific space within the building.
- Commercial Condos: Commercial condos are similar to commercial coops, but tenants purchase an individual unit in a building instead of shares in a cooperative corporation. The units serve various commercial purposes, such as medical practices, offices, retail spaces, or restaurants.
- Ground Floor Professional Space (Coops or Condos): Many mixed-use properties have residential units above and commercial space on the ground floor. Healthcare practitioners, such as doctors, dentists, or therapists, commonly gravitate to these ground-floor spaces to buy space for their practice.
- Buildings: Buildings are commercial properties that a business can purchase outright. However, buying an entire building in New York City is a costly undertaking and not always realistic.
Pros and Cons
- Complete Control: With ownership, you are no longer beholden to a landlord’s requirements or restrictions.You have complete control over your office space and can design and furnish it however you choose. Moreover, you don’t have to worry about obtaining additional approvals from a landlord to improve or renovate your office space. You only have to adhere to the building regulations set by the commercial cooperative or condominium.
- Appreciation: Property values tend to appreciate over time in real estate markets such as New York City, particularly in popular neighborhoods with high potential for development. As an owner of a commercial property in such an area, you are likely to make a substantial profit on your investment if and when you decide to sell.
- Stability: Moving offices can be a time-consuming and disruptive experience, involving relocating staff, furniture, and equipment. However, if you own your office space, you can avoid this hassle altogether. Instead of risking an occasional office relocation, owning helps you establish a strong and stable presence in your location and foster a sense of connection with the community.
- Tax Breaks and Other Financial Conditions: When you buy rather than lease commercial real estate in New York City, you can deduct mortgage interest payments, property taxes, depreciation expenses, and other expenses from your tax bill. Interest rates on commercial mortgages may also end up lower than rental fees, especially for well-qualified buyers.
- Less Flexibility: Owning office space provides stability but lacks flexibility. If a company outgrows its space, it might have to sell or lease additional space and relocate.
- High Upfront Costs: Buying office space requires a larger upfront investment than leasing, including property, appraisal, and maintenance fees, as well as a significant down payment and potential upgrade costs. In contrast, leasing landlords often offer a tenant improvement allowance or build-out on behalf of the tenant.
- Fluctuating Business Conditions: Buying New York City commercial real estate is generally considered a solid long-term investment. However, economic circumstances can cause a drop in property values, fluctuations in business conditions, or financial losses.
- Greater Financial Responsibility: Owning your office space means taking on tenant and landlord responsibilities. As an owner, you’ll need to handle maintenance, repairs, and other tasks that a landlord would typically take care of, which can be time-consuming and distract you from running your business.
Leasing Office Space
Leasing office space has many benefits, like flexibility, fewer upfront costs, and landlords taking care of many things for you. However, there are other drawbacks to consider as well.
What Tenants Would Prefer to Lease Rather Than Buy?
- Startups: Leasing provides more flexibility for businesses just starting out. Startups do not have the capital to purchase a property. They may also prioritize the ability to scale their office space up or down as needed.
- Small Businesses: Small businesses may prefer to lease as it allows them to focus on growing their business without worrying about the responsibilities of owning a property.
- Companies With Limited Cash Flow: Companies with limited cash flow may prefer to lease as it allows them to conserve their capital and invest it in other areas of their business. Leasing is also a more affordable option in the short term since it requires less upfront capital than purchasing a property.
- Businesses With Uncertain Growth: Businesses that are uncertain about their future growth may prefer to lease as it allows them to easily adjust their space requirements as needed.
Pros and Cons
- Flexibility: Flexibility is crucial when deciding between buying and leasing office space. Buying offers long-term predictability and appreciation but is an inflexible long-term commitment. Leasing allows flexibility in adjusting to a company’s changing needs, with landlords often able to accommodate requests for larger or smaller spaces mid-lease.
- More Affordable Upfront Costs: Owning an office space comes with high upfront costs. Not only do you not have to deal with this when leasing. Landlords may even offer incentives such as several months of free rent to attract tenants. Plus, a lease transaction is much less complex with reduced transaction costs.
- Landlord Responsibilities: You have the advantage of not worrying about maintenance, repairs, or property upgrades when you lease a space. These are the landlord’s responsibilities unless you have a triple-net lease. By not worrying about these tasks, you can devote more time and resources to operating and growing your business.
- Unpredictable Costs Over the Long Term: Leasing office space makes you vulnerable to price fluctuations such as rent increases and proportionate shares of real estate tax increases over the base year.
- No Equity: If you own commercial real estate in NYC, you still build equity, even if the property does not appreciate. Leasing does not provide this benefit. If you lease, you cannot profit from the property, use it as collateral, sell it to fund your next business venture or retirement, or benefit from the various tax breaks.
- Lack of Control: If you lease, you must obtain your landlord’s permission before making any modifications, improvements, or build-outs to your space. Furthermore, depending on the terms of your lease agreement, you may also have to cover the costs of these improvements.
How to Make the Best Decision for Your Business Needs
When deciding to buy or lease office space, it’s crucial to consider all aspects that may impact your business, including location, space requirements, financing options, and costs. Working with an experienced local broker can help you make informed decisions and negotiate the best terms on your behalf.
Are you looking for office space in Manhattan? Is your business seeking out space in a modern building with state-of-the-art amenities? Or are you a small startup that needs little more than a budget loft? Contact us, and we can help you find the best option for your business.
To learn about available office space, call Metro Manhattan Office Space at (212) 444-2241 or email us at [email protected].