Economy and Media & Marketing and Real Estate & Retail and Small Business

VOICES FROM THE INDUSTRY: As construction costs rise, older buildings gain appeal

April 24, 2006

Construction costs continue to rise in the wake of hurricanes, tornadoes, the war in Iraq, the building boom in China and general inflation. The trickle-down effect often lands at the feet of small business owners.

According to the U.S. Bureau of Labor Statistics' Producer Price Index, prices for materials and construction components increased 0.3 percent in February, following a 1-percent hike in January and continuing a threeyear upswing.

The average building cost index has increased about 45 percent since 1995, according to Turner Construction's latest index, released last month. There are not any signs of this trend slowing, especially as talk of $3-a-gallon gas get closer to reality.

For business owners, these costs hit home in the bottom line of increased rents and purchase prices for office space. But those business owners who look beyond new construction and consider the possibilities of older properties and/or opt for leasing situations instead of purchasing or building can avoid bearing a significant share of these costs.

Is visibility important?

As with any real estate transaction, the principle of "location, location, location" is a primary factor in terms of cost. A prime spot in an office park with visibility from Interstate 465 may be tempting for a business, but if that kind of access and visibility isn't crucial to the business' success, a spot at the rear of that same park-or at another park away from such a major thoroughfare-could be a smarter and less expensive option.

And if the location of the business space is a minor factor, perhaps the building's outward appearance also is down the list of importance. A facility built 30 years ago is not likely to have any eye-catching or cutting-edge architecture, but it also won't give you sticker shock. And best of all, for utilitarian space, it may be the perfect choice.

A creative option

Even the most simple warehouse space, with a creatively designed interior, can fit the bill for all sorts of businesses, from salons to exercise facilities to gymnastics studios to even churches.

Property owners with an abundance of these older spaces will offer them at prices not far from the going rates five years ago, and they can help in customizing a unit to an owner's needs.

There can be great flexibility in some of these spaces-for example, a warehouse with loading docks and overhead doors can be turned into offices, and a building with 16-foot ceilings can be transformed into two-story offices.

Accountants and lawyers still may require a traditional office building, but those businesses that don't need such surrroundings and can think outside the box a little can find value in traditional warehouse space.

Financially, small business owners may find the best value in a longer-term lease. Developers can cut down on marketing costs if their inventory is locked up in longer leases, and the lessee gains a more stable rent schedule that may include increases for inflation, but certainly will be more predictable than a shorter term or year-to-year lease.

Business owners who opt for short-term leases will initially pay higher rates and could face a higher percentage increase if they only renew one year at a time.

Ownership headaches

Of course, rent increases are nonexistent to a property owner. Ownership is probably a dream of many small business owners-an indication that they've "arrived." But arriving at this step also can mean a new set of headaches that have nothing to do with the business itself.

Owning a property means finding someone to plow the snow in the parking lot, calling a roofer when there's a leak, contracting a landscaper for the grounds.

Time spent tending to these tasks is time away from one's core business, and the leaky roof might not even be over the owner's head, but over the head of another business leasing space in the same building purchased by someone hoping to grow into the remaining space a few years down the road.

Property management responsibilities are something to consider before plunging into ownership. Additionally, and perhaps more importantly, tying up capital in real estate and improvements keeps it from being available for a small business' core competency, which can hinder growth and product development.

Ownership can be a sensible choice for those needing a specialized facility that can only be built new, or for those seeking an investment opportunity, as real estate is still an excellent place to park cash. With exception to those two situations, leasing remains an attractive primary option. With a leasing arrangement, one can expense the rent immediately as opposed to depreciating a building's cost over time.

In central Indiana, the office and warehouse building boom has slowed somewhat for many developers along with rising construction costs, but many prime properties continue to be built in highly sought locations.

Developers happily will sell those buildings to businesses willing to pay top dollar. At the same time, the economy is strong and, for some developers, that means inventories of pre-occupied space have stabilized or even decreased slightly.

Businesses with some flexibility and creativity may find opting for those spaces to be a more economical option, and now may be the best time to make that move.
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