The Buy to Suit

by CoyDavidson on August 25, 2011

Corporations don’t often see such favorable opportunities to buy commercial real estate as they do today. Lately we are seeing quite a few well-capitalized corporate office space users opt for ownership instead of leasing at least for a portion of their corporate real estate portfolio.

In order for a business to satisfy its office space requirements they have basically four options:

  1. Lease or sublease space;
  2. Acquire an existing building and renovate;
  3. Build and own your own facility; or
  4. A build-to-suit-to-lease.

The decision to own or lease real estate is based on numerous internal and external factors. Leasing provides the most flexibility and the “build to suit lease” is an alternative that allows the user/tenant to design and customize a new facility to meet the enterprise’s unique space needs without the large up-front capital expenditure that comes with building and owning. Build-to-suits are generally considered more expensive than leasing existing (vacant) space, particularly in today’s market where vacancy rates have risen and building owners are aggressively courting tenants with attractive leasing terms and concessions.

Lower Real Estate Values Driving User Office Acquisitions

Real Estate acquisitions by corporate users are often driven by the desire to reduce occupancy costs. Today’s economic environment where real estate values have in most markets decreased significantly is providing attractive opportunities for many corporate users who are sitting on record volumes of idle cash. The net cost of occupying an asset purchased at today’s lower prices can be significantly lower than the cost of leasing space, even if the user pays a premium for the asset compared to what an investor might pay.

There has been considerable discussion regarding the new Lease Accounting changes and whether it will make leasing less desirable for some corporate space users, as all leases will be going onto the balance sheet and recorded as an expense up-front rather than annually and as a result removing one of the benefits of leasing. This could be a significant decision driver for companies who are concerned with the magnitude of assets on their balance sheet and have access to lower borrowing costs.

However, the uptick in recent user real estate acquisitions is more about the opportunity to acquire office facilities at values that reduce occupancy costs, as well as secure strategic sites that fit into overall long term real estate plans. In some cases even if a particular building requires significant capital improvements, the underlying land is attractive to the users long term plans. The building may be torn down at some point and replaced with a more modern state of the art facility.

We are at one of those rare stages of the economic cycle where most corporations have recovered from the economic downturn but the real estate market has yet to do so. Today’s market opportunities place a premium on taking a more strategic view of corporate real estate within the enterprise’s long term objectives. The “buy-to-suit” is an alternative that should be explored by corporate space users with sufficient capital to deploy.

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