You've probably seen the headlines touting the demise of commercial real estate--it's the next bubble due to burst.
One of the trends highlighted in this news coverage is the natural increase in office and retail vacancy rates that accompanies a recession. Consumers slow spending, as a result businesses contract, and their needs for space contracts as well. It's a bad time for landlords for sure, but it's a potentially life-altering opportunity for business owners.
I speak of making the change from tenant to owner. Business owners who make this fateful decision add a significant dimension to their shareholder value. It's not unlike the difference between working for someone else and working for yourself.
I like to view this difference within the context of the final day on the job. Owners and employees will both make money along the course of their careers, but only owners have the final day paycheck. Most likely it'll be the biggest paycheck of their career, as they extract the shareholder value they've built up over the years.
Being an owner and user of a commercial building has the same impact. On that final day, be it a new venture or retirement, there's another last paycheck coming; the sale of the building.
One of the reasons commercial property ownership can lead to another payday is that successful real estate investing requires patience. Few business owners are in it for the short term--this makes them the ideal candidate for successful real estate ownership. SMB owners are less likely to jump ship during a down cycle and more likely to hold onto their real estate until the market cycle brings the value back to new highs.
Another reason is the fact that occupancy expense is already a major item in the business owner's budget. There isn't a question of whether or not to take on the risk of such an obligation, the obligation already exists. The question is who to make the checks payable to; a landlord who'll use it to amortize their loan and build equity or direct to the bank, where the equity accrues to the business owner. For many the answer is a no brainer.
Let me give you an example from a recent closing. A small private practice attorney ran his business out of a small, non-descript building in a quiet suburban community outside Manhattan. He often gave away his services to needy clients who couldn't pay. The way he put it, "I am a good lawyer, but a lousy business man."
In the end, he didn't grow a practice with partners and associates. It was just him, the paralegal (his wife), and an administrator. There was nothing to sell once he retired. He had, however, bought the ugly ducking building 30 years earlier.
Was this a life altering decision? You bet it was. On his final day of business, he received a check for $650,000 at the closing. His retirement was secured; he'd moved from a life of worry to a life of financial security.
At that closing was another attorney who was making the life altering decision to buy the building and set up his private practice there. The seller handed over the keys to the buyer with a tear in his eye, and said, "take care of her and she will take care of you."
Since that experience I've seen a pattern; the affection many owners have for their property runs deep. It may sound silly, but people frequently talk about their buildings like they are members of the family. They ascribe human traits to them, and this affection gives them the patience to hold, repair, improve and nurture the building's potential.
That retired lawyer showed that his affection for his law practice extended to his little, non-descript piece of real estate. He loved that building and it loved him back, with $650,000 hugs and kisses.
Greg Rand is a 20-year real estate industry leader and Managing Partner at Better Homes and Gardens Rand Realty, a New York- based full service real estate brokerage. As an authority on housing patterns, he's a regular FOX TV news contributor and you can find Greg's advice on his blog House Rich.