Buy Low

In a survey of over 1,500 global business leaders reported last month, McKinsey & Company found that their top strategic priority (selected by 45% of the respondents) was to cut operational costs.  This is not a harbinger of impending growth and prosperity for commercial property developers and investors.  Cutting costs is more likely to involve reducing a company’s property footprint than increasing it.

It also suggests the kinds of strategic and tactical issues logistics and supply chain professionals are apt to face in the months ahead.  Cut operational costs.  Do more with less.  Increase throughput.  Reduce cycle times.  Get more done faster, with fewer errors, for less money.

Is there a pony in there?  I’d like to think so.  There may actually be a happy confluence of events for many supply chain managers today:

-    Property owners need to stabilize their portfolios today.  With debts maturing over they next few years – and with unfavorable loan-to-value ratios and other fundamentals - they are willing trade lease extensions for lower rents and concessions like free rent (typically, you can roll back your base rent and obtain 3 to 5 months of free rent on a 5 year term).

- For the same reasons, property owners are also interested in trading leases for cash.  If you now rent a building and have the means to purchase it, your landlord may be happy to convert your lease in to an agreement of purchase and sale.

- Commercial banks will make mortgage loans to owner/occupants, but not to investors.  If your business has a healthy balance sheet you can take advantage of the current lending environment to buy property you are now renting.

So, if you are facing pressures to cut costs, you may be able to use the current conditions in the commercial real estate market to your advantage.