Is It Smarter to Rent or Own an Office Space?
As employees return to office in the wake of the pandemic, your agency has likely undergone quite a few changes—including the creation of a hybrid schedule. For some, a return to office has meant clarification on your remote workforce. What many of us have learned (outside of Disney, Tesla, Netflix and others adamant about return to office) is that we don't need people physically in the same office for 40+ hours a week to maintain efficient work. Not only are those days long gone; they actually seem archaic in retrospect.
On the flipside, giving your employees the freedom to work from anywhere has resulted in decreased utilization of your office space. This trend (or new normal) has made you consider something you haven't given much thought to in the past: your real estate and office strategy.
When your office lease comes up for renewal, many of you want to have answers for two questions:
Should I downsize current office space?
Should I continue to rent, or should I purchase a building?
As you may have guessed, there is no clear-cut answer as there are pros and cons for renting vs. leasing office space. But in order to help you make a decision that best fits your needs, I've put together the following list of pros and cons for owning an office space (with the assumption that many of you currently rent your space).
Owning Office Space (Pros)
Build Equity: Potential to build equity if the property appreciates over time. Many of you have stared at your balance sheets over the years and want to find another avenue to build wealth.
Fixed Costs: Locking in your commercial mortgage for the long-term provides your business with clear, fixed costs. Leasing does this as well, but only for the term of the lease.
Passive Income: Opportunity to sub-let unused space to another business, thus providing you with an additional income stream.
Culture & Collaboration: Less restrictions on remodeling or decorating the space, which gives you complete control over the look and feel of your workplace. More than other businesses, marketing agencies tend to spend a lot on office improvements to make their spaces creative and fun.
Owning Office Space (Cons)
Capital Intensive: Requires significant cash outlay upfront, which could tie up your cash in real estate. (Side note: It's possible to get an SBA real estate loan with a 10% down payment, but the math works better if you can make the usual 20% down payment.)
Reduced Cash Flow: You are responsible for property maintenance and repairs, which may take time away from running your business and will eat into your profits.
Becoming a Landlord: With this purchase, you are essentially the property manager for your business (and another business if you sub-let the space). In addition to servicing your clients, you could put yourself in a situation where you are also servicing tenants.
Revising Ownership Agreement: If your agency has more than one equity owner, you'll have to think about updating your ownership agreement to include joint property.
Illiquid: Potential to lose money if you need to sell for any reason in a down market.
When my clients are grappling with this decision, I ask them the following questions:
How likely do you think your space requirements will change over the next couple of years? Will ownership of a building make it hard for you to adjust to new space requirements?
My Take
Owning vs. renting is not merely a financial decision—it’s also a risk and vanity decision. 50 Cent has a line in a song where he says, "My watch talk for me, my whip talk for me..." Some agency owners are taking a page out of 50’s playbook and looking at purchases to signal credibility. But in reality, there are plenty of cost-effective ways to communicate that your business is legit. So, make sure your purchase decision is driven by the needs of your business and not your ego.
The decision to own real estate for your business should be made once you've determined your people space needs. If your labor force is still growing or you still want it to grow, then now is not the right time to buy a building. There is a caveat to this rule. If you feel prepared, you can buy more space than you need and rent out the excess space until you can fill it with your own people. But generally, you want to look at buying a building when you've determined the size where you're comfortable. For some, that might be a 10-person agency; for others, that may mean a 60-person agency and a workplace to match.
If you are leaning toward buying a building, then I recommend personally buying the building and having your business pay you rent. There are tax advantages to this approach. Talk with your tax accountant to learn more about if this might be the best choice for you.