Why Businesses Should Consider Ground-up Development vs. Acquisition
Any owner that has managed a growing business understands the dilemma -- if you're expanding or need to relocate, should you build a new property or buy an existing building?
Aside from strictly dollars and cents, real estate development offers business owners a couple of distinct benefits over acquiring an existing property.
Guide to the video
- Most small business owners simply view their real estate as an operating expense rather than a strategic business asset
- Real estate development offers more expansion and timing flexibility than an existing property
- A properly optimized facility can improve operational efficiency and increase a company's bottom line
Video transcript follows
It almost sounds counterintuitive when you think about it. Because wouldn’t a new ground-up development project be more expensive than acquiring an existing property?
In some cases, absolutely. In others, it’s not that simple.
Because the decision to build vs. buy is contingent on a series of market and business-specific criteria that when analyzed holistically, often paint a much different picture than strictly than dollars and cents on a spread sheet.
And as you’ll soon find out, in today’s operating environment, it’s often cheaper to build in many situations anyway.
Stay tuned as I unpack it in this video.
What’s up everyone, it’s Matt Marsh, founder of Marsh & Partners.
Marsh & Partners is a development and national consulting firm that helps business owners and investors maximize their real estate and transform their businesses.
Building vs. buying for operating companies
Today we are going to talk about a topic that every business owner either knowingly, or unknowingly, wrestles with throughout the life cycle of owning and operating a company – and that’s buying or building a new location.
I work with a lot of small business owners. I help them navigate challenging real estate problems with the intent of not only augmenting their business, but actually amplifying and maximizing their business’s outcomes and improving their bottom line.
But there’s a common characteristic I see pretty frequently amongst owners – a lot of their real estate decisions happen by default. Their real estate is simply a line item on their P&L statement – a constant rent or mortgage cash outflow that’s just looked at as a cost of doing business.
And that’s not a knock on business owners, it’s just the reality. They’re experts in their unique craft or the product they’re selling, and operations and personnel management, not in the nuances of real estate ownership or development.
But it means that a lot of important questions are left unanswered, but even more importantly, unasked.
Think about it this way. Most business owners are pragmatists. Decisions are generally made absent of strong emotional influences. Decisions are made based on available cash and dollars and cents today.
But what if I told you the opportunity cost of not asking those questions could impact the efficiency of your business for years to come. And leaves you in a situation where your real estate may not be optimized for your business.
So that’s why today I want to talk about ground-up development and why it may be a good option for expanding and relocating businesses.
As a business owner, there are several factors you need to consider in order to make an informed decision moving forward.
Flexibility in timing
The timing of investment decisions and flexibility is a huge challenge that business owners contend with on a daily basis.
It’s not uncommon that in preparation for a relocation or expansion, an owner will say something like, “we’ll need to move and find a space in the next year or two.”
But there’s a problem with that kind of statement. The availability of adequate space to purchase doesn’t adhere to a timeline you’ve prescribed. Who’s to say that the week after you’ve made your decision, the perfect place comes available for sale.
What then? Are you prepared to move on something quickly? Or does moving in the next year or two mean you want to find the right space in 12-18 months.
On the other hand, real estate development offers much more flexibility. Sure, there’s the risk of timeline delays during the land entitlement and construction process, and supply chain and labor disruptions can delay a project, but you have much more control over the process than you do when the perfect building might hit the market.
Understanding the real estate development process and how long it might take you allows you to plan ahead more effectively for your relocation.
Acquisition vs. replacement cost
Traditionally, acquiring an existing property has almost always less expensive than developing a new one.
That’s where the concept of replacement cost comes in. It refers to the cost of replacing an existing asset with a similar property at current market prices.
But that symbiotic relationship between acquisition and replacement cost relies on a free-market supply and demand equilibrium. When market manipulation like stimulus money and central bank tinkering throws off that equilibrium, the relationship between the two becomes much less straightforward.
Even amidst rising construction prices and labor challenges, supply side dynamics have become such a challenge for potential buyers that prices for existing real estate have in many cases become untenable.
And that leaves one of two options. You must either resort to leasing or building. And development is the only one of the two options that allows you to capture the benefits of real estate ownership.
Opportunity for on-site expansion
Most existing real estate sites have been maxed out density wise from a horizontal perspective. That means that the only way you can pack more onto a site is by going vertical.
But what if going vertical isn’t an option? How then can you expand within your current facility?
Development can offer a solution, but it all begins with buying the right piece of land on the front end.
During site selection, it will be critical to deliberately map out your 5-, 10-, and 20-year growth plans. From there, you can weigh what size facility you’ll need day one vs. in the future and find an adequate site that can support that future growth.
Real estate development even offers the flexibility of designing a building with future growth in mind.
Your architect can program the floorplan to more seamlessly add future space that flows well. And your structural engineer can design a building that can feasibly support expansion.
So as long as you’ve considered your possible future growth needs, and selected a site that allows for an increased footprint, development often offers more opportunity for expansion that an existing facility.
Have you every walked into a facility and thought, “man, what were they thinking with this layout?”
Aligning your real estate with the goals of your business is important. But an often-overlooked aspect of that alignment is how well your actual physical real estate supports and enables your business operations.
As a business owner, you’ve worked hard crafting a workplace that embodies your cultural values and differentiates yourself from competitors. But does your real estate supplement that culture?
Does it strike the right balance of private and collaborative space to foster maximum cohesion?
Or you can think about it in terms of workplace productivity.
How efficiently is your space laid out? Are reliant functions and operations adjacent and supportive of one another? Does the real estate foster more effective communication or faster product delivery?
I’m not being hyperbolic here. A properly optimized facility can greatly impact your bottom line.
Facility optimization is the union of forward-thinking real estate and business strategy. And a ground-up development project offers a business owner the opportunity to craft that vision from scratch as opposed to having to work within the confines of an existing piece of real estate.
None of this is to say that land development doesn’t pose a unique set of challenges. Properly sequencing your real estate due diligence tasks is critical to ensuring you thoroughly investigate a property. And land entitlement risk is something that every developer needs to contend with.
But there comes a point when the opportunity cost of not developing and owning your own property outweighs any potential cost savings acquiring an existing facility.
If you’re confused, eager to get started, or just want to learn more, I’d be happy to chat. Marsh & Partners offers various real estate consulting and development services aimed at helping small business owners better diversify their business, and properly align their real estate with their long-term visions.
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