Considerations for Leasing vs. Owning Your Space

Considerations for Leasing vs. Owning Your Space

Undoubtedly, end users were the driving force behind the surge in the NYC investment sales market in 2023, culminating in a substantial uptick in the fourth quarter. This surge was primarily attributed to Prada's acquisition of 720 and 724 Fifth Avenue for $800 million and the impending $900 million purchase by Gucci on the coveted retail corridor. Examining the past few years, such sales are not isolated incidents; end users, particularly foreign companies, have been establishing permanent roots in our city for as long as memory serves.

With numerous investors remaining on the side lines and financing proving scarce for vacant spaces, end users have seized the opportunity to become more competitive. According to Avison Young's research, 66% of vacant retail sales and 67% of office spaces were acquired by users in 2023. Considering the approximately 100 million square feet (msf) of available office space with a precarious 20% vacancy rate, it is unlikely that this trend will diminish any time soon.

This shift is viewed as a positive trend for NYC, exemplified by companies like Hyundai, which not only acquired offices at 13-17 Laight Street for $275 million but also secured a likely retail showroom in the Meatpacking district for $22.5 million, solidifying their permanent presence in the city.

What are the pros and cons of ownership? What factors should you consider to determine if buying or leasing your own space is the right choice, regardless of whether you're a retailer, office user, or industrial tenant? Below, we'll explore each scenario.

Pros For Leasing

• Less upfront capital - Particularly with office space, concessions are abundant. Landlords are willing to build out space, provide generous TI allowances, and offer substantial free rent, eliminating the need for a substantial down payment.

• More flexibility - For rapidly growing companies or those uncertain about their future space needs, leasing short-term or sublet space allows for adaptability in terms of growth and contraction.

• More desirable space - For a 10,000-square-foot (sf) office tenant, being in a fully amenitized building might be more appealing to employees than owning a standalone townhouse. While buying an office condo on one floor is an option, these generally do not match the quality of more institutional office stock.

Pros For Purchasing

• Controlling your destiny - In the long term, a 10- or 20-year lease is not a lifetime commitment, especially for a luxury brand that has invested significantly in its build-out and established location. Ownership eliminates the risk of a landlord wielding significant leverage during a renewal.

• Future upside/appreciation - As an owner, you can participate in future upside. Many commercial properties have seen the land become more valuable than the business due to upzoning or positive neighborhood changes.

• Financing - Small business loans are worth considering if you qualify. Loan-to-values (LTVs) can go up to 90% and may include financing for your build-out.

Other considerations

• Analyzing the cost of buying vs. leasing should be a comprehensive process, considering the down payment amortization, mortgage carrying costs, operating expenses, and lease costs. Assumptions regarding future property appreciation versus zero residual value on a lease need to be made.

• Consult with an accountant regarding lease liabilities versus the benefits of depreciation.

• Ownership allows for a 1031 exchange.

• Real estate tax exemptions are available for non-profit or government owners.

• Purchasing a property eliminates the need for a security deposit and reduces landlord credit risk, a factor gaining prominence as many owners surrender keys back to lenders.

• Consider carrying costs (real estate taxes, operating expenses) during tenant fit-out.

• More than 96% of office space availability in Manhattan is for lease.