As Preferred Public Relations & Marketing grew its client base and expanded its staff over the past five years, owner Michele Tell came to a defining moment. She and her husband/partner, James Woodrow, had moved the boutique firm’s Las Vegas office three times. With each move, the business quickly outgrew its space. Luckily, said Tell, her husband’s background in finance and real estate came to good use.
In April, the business moved into a 5,061-square-foot building that Tell and Woodrow purchased in a small southwestern Las Vegas office park developed by Shea Commercial, allowing Preferred Public Relations to create a personalized headquarters. Using about 3,200 square feet for the marketing business, the remaining 1,800 square feet was leased to a mortgage company, giving Tell and Woodrow added income.
Preferred Public Relations was one of hundreds of Nevada companies analyzing a similar situation – should a business buy its own facility or continue to lease office space?
The choice, according to most experts, comes down to several factors:
Financial capabilities, such as having the down payment available and finding favorable interest rates; also, does the cost per square foot make financial sense?
A company’s business plan for growth – how far in the future does a business predict it will outgrow its existing space?
Personal choice
The type of business also makes a difference in deciding whether to buy or lease. Although buying office space is becoming increasingly popular, Kevin Higgins of Voit Commercial Brokerage in Las Vegas said it doesn’t make financial sense for a retail operation to purchase its own space. However, warehouse and industrial businesses have been slowly moving toward the trend of purchasing space rather than leasing. And price per square foot is always a consideration. “Taking a loan to purchase office space might pencil out to 65 cents a square foot,” Higgins said. “In most cases, the asking rate for a lease on similar space might be 75 cents to 80 cents a square foot. So, it makes financial sense to purchase rather than lease.”
Cyndi Inman, principal of Priority One Commercial, a Las Vegas-based brokerage, remarked, “Right now, it makes sense for a lot of small companies to buy a building, because low interest rates mean a mortgage payment may be less than a lease payment. However, every client who walks in the door is different.” Her partner, Julie Collins, agreed, adding, “There are a lot of other factors to consider besides monthly payments. That’s why we take the time to look at each client’s needs and see whether leasing or purchase will best fit their company’s situation.”
Northern Nevada has seen a steady influx of businesses seeking to purchase office space for company headquarters. John Pinjuv of Grubb & Ellis/Nevada Commercial Group said while Nevada-based businesses are seeking to purchase commercial sites from 2,500 square feet to 5,000 square feet, the last 24 months have been good for Reno’s commercial leasing market due to businesses relocating from Northern California.
“We have a very hot real estate market in Northern Nevada,” Pinjuv said. “Of the California customers moving here, most seem to be interested in becoming tenants. The leasing business continues to be very active, and commercial development sites are readily available in the Reno area.”
Michael Lantz, owner of Lantz Wealth Partners, a Las Vegas financial planning firm, said buying office space should come only after a company answers several “what if” questions, primarily regarding its financial capabilities. He said it makes sense for a stable business that plans to remain in a particular location, such as a medical provider, to build its own facility.
Lantz, a certified public accountant with more than two decades of tax consulting experience, said there are tax incentives to businesses owning their office space. The owners of most small businesses, he said, will purchase a building through a separate entity in order to have the business pay rent on the space. Nevada’s corporate environment, Lantz added, favors businesses buying their own office locations due to low interest rates, available commercial property, and the eagerness of banks and the Small Business Administration to help finance such ventures.
“My personal philosophy is that all portfolios should include real estate investments in addition to your own home,” Lantz said. “It’s a matter of choice, and the market conditions in Nevada are very favorable to companies owning their own locations. Sometimes, when a business owner pencils it all out, the choice becomes very clear.”
Preferred Public Relations considered all the pros and cons while deciding its move into office ownership. “We’re an aggressive firm with plans for continued growth. The interest rates and the finances made this move a pretty easy decision,” Woodrow said. “The hard part was finding the exact location to fit our business’s needs.”
In the three months following the move, Tell said Preferred Public Relations doubled its staff from six to 12 while adding several more clients. Eventually, she said, the business will take over the space it now leases out. “Down the road, who knows? If we outgrow this space, we might turn around and lease out this building and move somewhere else,” Woodrow said. “Owning our own space gives us options. It also sent a message to our clients and potential clients that our company is part of this community and we’re here to stay.”
Jim Stuart, president of Centra Properties, which develops retail and office locations throughout the Las Vegas Valley, said it is financially advantageous for larger companies to lease office space rather than purchase, especially when the businesses have requirements of 15,000 square feet to 20,000 square feet.
“Think of your office space as another vendor,” said Stuart, whose signature $75 million Centra Point complex off the I-215 and Durango Drive leases space to companies requiring 20,000 to 40,000 square feet of space. “Let the property owner worry about the electricity and water and other essentials. It frees a business to focus on its core disciplines or other areas, such as customer service.”
Stuart also advises small, growing businesses against buying space, because accelerated growth could cause a company to outgrow its facility more quickly than expected. Stuart speaks from experience – his original land development company, Stuart Mixer, moved four times in seven years because of growth. The company, he said, could have purchased its own office space, but didn’t, because re-selling the property could have been difficult.
“My caution to small businesses considering buying office space is that they need to be mindful of the price per square foot,” Stuart said. “You can put a lot into the building, but you may not get it all back when it comes time to sell.”
Planning for expansion is an important consideration in purchasing office space, said Jeff LaPour of LaPour Partners, a Southern Nevada commercial property developer. He said the average purchase size in his projects is between 8,000 and 10,000 square feet. “At that size, companies have a tremendous amount of flexibility for growth,” LaPour said, “We have a very healthy market for both commercial leasing and commercial sales in Southern Nevada. Even with the strong interest in commercial sales, the properties we’ve had available for lease are 100 percent occupied. The customer base is there.”
Shea Commercial Las Vegas maps out the benefits of office ownership for its clients. Lucinda Stanley, senior vice president for Shea, which has developed 1.2 million square feet of commercial property in Scottsdale, Ariz., Texas and Las Vegas, said Southern Nevada was slow to get into the commercial ownership market. She said interest rates would need to climb back over 10 percent to put a damper on the office-purchase market.
“Most tenants still have to come out of pocket for interior improvements,” Stanley said. “Most landlords will pay $25 to $35 per square foot for tenant improvements, which usually cost more than that. Medical offices, for example, may run above $40 per square foot. With those figures, it makes sense to purchase rather than lease because you are still going to have pay for improvements.”
Developers have responded to companies’ demands for more choices by building projects that offer both sales and leasing opportunities. Cheyenne Valley Gateway, an office and retail master plan being developed by Lyle Brennan Investments in North Las Vegas, offers a variety of options. “We work with business owners to help them decide whether leasing or purchasing their space will work best for them,” said Lyle Brennan. “Then the next step is deciding on financing. We even offer a lease-option plan that allows lease money to be credited toward the purchase price.” In a market that encourages business owners to investigate all their options, developers and brokers who offer the most choices would seem best able to respond quickly to market forces.
