Is Your Building at a Tipping Point? How to Decide Whether to Upgrade or Relocate

Commercial property owners have a lot on their plates. They have to manage tenants, provide upkeep for buildings, and may even run businesses out of the buildings, themselves. As a result, it's not uncommon for commercial buildings to wind up in a state of comparative disrepair.

When this happens, property owners have two options. They can either upgrade their buildings or relocate to a new location. This article will offer some insight into what commercial property owners need to consider before making such an important decision.

Location Matters

Even a run-down building in a prime location is more valuable than any commercial space found far from the center of town where no customers or clients are likely to visit it. It may be tempting to just sell off an aging or run-down building and move on to greener pastures, but remember that the grass is always greener on the other side.

Many buyers find that purchasing a more up-to-date building in a similar location is out of their budgets, even after they get money from selling their current properties. In many cases, it's actually cheaper to have the building demolished then hire a company like Cochran Engineering to design and build a building better suited to the property owner's needs than it is to purchase a fully modern building in another popular area of town.

Don't even bother considering a property located far from other residential and commercial areas unless the company already has a substantial, loyal customer or client base built up. It won't just be difficult to attract new customers. Convincing employees to commute further out of town can also pose serious problems.

It doesn't matter whether property owners rent space to commercial clients or run their own businesses. Either way, they should consider location and take a look at the local real estate market before deciding whether to upgrade a building on the existing piece of land or purchase a new one.

Potential Complications

Substantial renovations make it difficult for employees to work. Occupied spaces also require more time to renovate than vacant buildings, so it's important for property owners to consider their current tenants' needs.

If the building is in a state of severe disrepair and does not currently have any commercial tenants, it's a no-brainer. The remodeling contractors will be able to work on multiple tasks at once, which will allow them to finish the project quickly and efficiently. Once the renovations have been completed, the property owner will be able to start renting out spaces again, charging more rent. This helps to make up for the cost of building upgrades.

When one or more tenants are still operating businesses out of the building, things get more complicated. Unless property owners had the foresight to include demolition clauses in their lease agreements, it's best for them to wait until the tenants' leases are up to either sell the building or perform remodels. Commercial landlords who want to upgrade their buildings can explain to their tenants in advance that they will be performing substantial renovations but would be happy to have them back when the project is completed.

If the building only needs minor renovations, property owners may be able to make arrangements to have it renovated one section at a time. They should make sure to let their tenants know what's going on and may even want to consider offering discounts on rent while new construction or renovations are underway. This will make it easier for business owners to make plans and increase the chances that good tenants will want to stay put, especially if the property is in a prime location.

Expanding Facilities

In some locations, such as shopping malls, facilities can be expanded without causing substantial disruption to the building's current tenants. Bear in mind that if the construction process will require one or more tenants to temporarily relocate, either within the shopping plaza or to a nearby property, the landlord typically pays the cost of moving to and returning from the premises. Balance the cost of temporarily relocating tenants against the potential benefit of adding more store frontage for future rentals.

Since shopping plaza owners typically operate outside of city centers, they have more leeway when it comes to renovating versus relocating. In some cases, it may be more affordable to find a new property that will accommodate more tenants than to expand an existing facility. Real estate investors who have sufficient working capital to invest in development may even be able to find vacant land closer to new housing subdivisions or other promising areas.

The Role of Intuition

Not all of the factors that go into most property owners' decision-making processes are based on rational cost analyses or recognition of potential complications. Sometimes, business owners and property owners alike just know it's time for a fresh start. Business owners who rent spaces have to wait until the terms of their leases expire, but those who operate out of buildings owned by the company can sell and move to a new location whenever they want.

It's never a wise idea to just throw caution to the wind and follow intuition. However, it's perfectly fine to use the feeling that it may be time to move on as motivation to research market trends, consider a move to a new city, or even find a developer who can design and build a brand-new office building, retail store, restaurant, or another commercial establishment.

The Bottom Line

The decision to either completely upgrade an existing commercial building or move to a new property is one that shouldn't be taken lightly. Property owners need to carefully consider not just their budgets, but also their responsibilities to tenants or employees and the potential disruptions to business as usual that come with both relocation and substantial renovations.

At the end of the day, there's no one right answer as to when it's better to move on than to upgrade an existing space. Property owners need to take not just their budgets but also everything from market forecasts to location, and, yes, even their personal intuition into account. Whether they want to relocate to vacant land or perform ground-up building upgrades, the most important thing is to find a good developer.