Is it better to own or lease in Wichita?

Download a copy of this handout by clicking here!

With the recent number of significant developments and growth in differing sectors of the Wichita market, an important question arises: whether to own or lease your commercial property. Do you want office space downtown, where new investment has created significant changes, with lower rates in some areas? Do you want your industrial operation near the airport where there is high traffic due to the recent expansion? Or does being in the industrial sector near similar business operations interest you? Do you want to be northeast with other significant office users? Would the northwest retail support another big box operation? All of these are imperative considerations and all extremely financially significant.

Leasing provides agility to businesses, especially businesses in growth stages that can merely assess their current space needs on a short-term basis. According to Mike DeHass, MAI, an appraiser with Martens Appraisal, the decision to buy or lease could differ depending on the company.

“The question may best be answered by where a particular company is in their life cycle,” DeHass said. “New, rapidly growing companies would best be served by leasing where a stable business should consider ownership. If the business is very volatile and only a 2 to 3-year projection on buildings needs are possible, leasing may be the best solution.”

Leasing also provides the opportunity to make capital investments in areas beyond commercial real estate. Patrick Ahern, SIOR, CCIM, Vice President of Office Services with NAI Martens, says taxes are important to take into consideration.

“A huge benefit of leasing commercial real estate is that rent is tax deductible,” Ahern said. “In ownership, mortgage interest, property taxes, maintenance costs and depreciation are all deductible but no equity built on the property can be deducted.”
Ownership encompasses the idea of “instead of paying rent, I can pay down a mortgage each month,” and if a company buys a building that it outgrows, there is the option to move and lease out the space.

Martens Appraisal’s LeAnn Adams, MAI reiterates the point that leasing gives the tenant more adaptability depending on the business’s needs.

“Leasing versus buying would allow a tenant greater flexibility in relocation,” Adams said, “as well as provide more options in downsizing or expanding their space needs.”

The bottom line is that real estate is an extremely competitive business, influenced by area users and specific markets in the Wichita metropolitan area. For instance, demand for industrial space is particularly high in the Wichita market and is met with a low supply. Office space is in high supply with relatively stagnant demand, yet the market continues to see new developments. There have been new developments in the multifamily market where occupancy rates remain high.

“An interesting long-term trend has been in the Wichita market where a business owner has owner occupied a space, then sells the business and uses the leasing of the space as a retirement vehicle, an extreme positive of ownership in those cases,” Ahern said.

New and innovative developments are changing commercial real estate in downtown and suburban areas of the Wichita market. New demands on differing spaces and changing demands on amenities have raised the question of whether the benefits of leasing or owning have changed. Ultimately, it is up to the business to decide which route helps them grow at an ideal rate; whether that be leasing and investing that capital in other facets or purchasing to meet the current needs of a business.

Advantages of Leasing

• Greater ease in relocating
• More flexibility if space is outgrown or needs reduced
• Landlord responsibilities with regards to building maintenance
• Less risk during recessionary periods or market downturns – rent would still be due until the end of the lease term, but wouldn’t have to renew the lease if the market were to change

Advantages of Owning

• Building equity in investment
• More control over costs / expenses
• Any remodeling needs of suites benefits the owners vs. someone else’s property
• Could buy or build larger than needed and rent excess space
• Tax advantages to ownership: Property tax deductions, Mortgage interest deductions, Depreciation deduction, maintenance change deductions
• Possibility to turn investment into a retirement vehicle

Shane Pullman

Commercial Advisor – NAI Martens
[email protected] | 316-262-4843