Rent or Own?

Should you take advantage of favorable real estate prices?

Written By:
Jay Jacobowitz
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Retailers usually lease their retail spaces because the cost of owning, developing and maintaining real estate is beyond the budget of most. With limited capital, most retailers rightly focus on “Job No. 1”: retailing. It also takes time to be a landlord, particularly if you’ve got other tenants besides yourself.

Today however, the lingering housing bust and high commercial real estate vacancy rates due to the slow economy mean values are at generational lows. In addition, federal stimulus dollars and public policy are creating new incentives to buy. For example, the U.S. Small Business Administration is more likely to lend you money for expanding your business if you plan to purchase a piece of property for your operations. Should you become an owner?

Austin, TX-based Whole Foods Markets owns approximately 15% of its real estate, or about 40 of its more than 270 stores worldwide. Also, I know independent natural products retailers that own their real estate who have done very well over the years because of increased cash flows from tenant rents and equity thanks to property value appreciation. Owning your real estate can be a very sweet deal, indeed.

But—and you knew there was a “but” coming, didn’t you?—I’ve also seen the real estate play come out badly. Here’s why. Populations move. About one-fifth of U.S. households relocate every year. While recently, household migration has slowed due to the economy, people are more or less constantly seeking a better lifestyle, and that often means moving away. Think about it. Every town and city has its “wrong side of the tracks”; places you prefer not to go, places where a business won’t do well. And you’ve seen previously “hot” commercial areas become ice cold when populations move and the once-popular shopping center loses its anchor store.

Owning your real estate can work out well. But if you have just one or two stores, you’ll tie up too much of your capital assets in the ownership basket. you’ll have much less flexibility to respond to changing markets. The bottom line is, retailing and markets are dynamic, and the challenges for an independent retailer are already great. Don’t lock yourself into a piece of real estate that may not always be where you want to be. WF

Jay Jacobowitz is president and founder of Retail Insights ®, a professional consulting service for natural products retailers established in 1998, and creator of Natural Insights for Well Being®, a holistic consumer marketing service designed especially for independent natural products retailers. With 34 years of wholesale and retail industry experience, Jay has assisted in developing over 900 successful natural products retail stores in the U.S. and abroad. Jay is a popular author, educator, and speaker, and is the merchandising editor of WholeFoods Magazine, for which he writes Merchandising Insights and Tip of the Month. Jay also serves the Natural Products Association in several capacities. Jay is next scheduled at Southeast Natural Products Association, Orlando, FL, speaking on Thursday evening, December 2, 7:00 p.m., and exhibiting at Booth 306 Saturday and Sunday, December 4th and 5th. He can be reached at (800)328-0855 or via e-mail at jay@retailinsights.com.

Published in WholeFoods Magazine, December 2010