Mariwyn Evans writes about commercial real estate for REALTOR® Magazine. You can reach her at firstname.lastname@example.org.
Smart Corporations Are Renters
A conversation with Jonathan Wiley about why most companies might be better off financially if they leased space.
July 12, 2013
Corporations buy office properties for a variety of reasons, but if they think they’re going to make money on the deal, they’re probably mistaken. That’s because, for the most part, corporations buy high and sell low, says Jonathan Wiley, assistant professor at the Robinson College of Business at Georgia State University in Atlanta. His research, which appeared in the fall 2012 issue of Real Estate Economics, concludes that many corporations might be better off financially if they leased space.
To what degree do corporations fare worse than other commercial real estate investors when buying and selling property?
My research, which used CoStar data to compare office property bought and sold by corporations and by noninstitutional investors, found that corporate investors overpaid by an estimated 12 percent when they bought property. Corporations also discounted property by an estimated 10 percent when they sold.
Companies that bought when a market was falling paid about the same prices as other investors, but those that bought when the market was expanding overpaid by 20 percent. When corporate owners sold during a contraction, they took a 39 percent lower price than noninstitutional investors. Essentially, corporations buy high and sell low.
What accounted for this significant difference in price?
Did differences in occupancy or operating expense play a significant role? No. When I controlled for differences in the sample buildings, I found that asking rents at corporate-owned buildings were only 2.2 percent lower than those at investor-owned properties. Occupancy at corporate properties was actually 3.2 percent higher. So gross revenues for the corporate-owned properties were almost the same as for those owned by investors.
Then how do you explain the difference?
Corporations value properties in a different way than investors. When traditional real estate investors look at a property, they focus on rents, occupancy, and operating expense. Corporations are buying for very different reasons. They consider psychological issues ranging from pride of owning a corporate headquarters to having an office near the CEO's home. Of course, there are also financial factors such as the opportunity to use the building as collateral if they need capital or tax savings from depreciation.
Are there other reasons corporations are often losers in real estate transactions?
One issue is that even though real estate accounts for between 25 percent and 40 percent of a company’s operating expenses, most businesses don’t have a staff real estate expert.
Another factor is that companies often buy when they have extra capital—during a boom—and sell when they need cash—during a contraction. Finally, corporations are less patient about waiting for the best price.
What conclusions does your research draw?
Most corporations are better off renting. That way they preserve their cash and stay focused on what their businesses do well. If you want your name on the building, hire a good commercial broker to find you the right space and put the signage requirement in the lease.