Buying or building commercial property

Real Estate Review

Your business has been changing, and you have made the decision to purchase your own property. Now you must decide whether to buy an existing building or build something from scratch. Here are some things to consider:

Location: If you decide to build, you can pick the ideal location for your business. If you buy a building, you must choose from what is available for sale. Depending on the type of business, this can be a critical decision. An attorney’s office can be on any street in the business park, while a restaurant often needs visibility, traffic count and great ingress and egress. 

Availability: The market is going to influence your decision as to whether you buy or build. If there are no suitable buildings available, you will have to decide whether to wait to see what comes on the market or take the step of buying a site and starting the building process. In Hampton Roads, the industrial vacancy rate is presently under 2 percent1, and properties for sale or lease are in short supply. If you are looking for an office building in the Oyster Point area, the vacancy rate is currently 10.3 percent2 and there are several buildings on the market. 

Timing: The time it takes to buy an existing property is much shorter than building from the ground up. Buying a building typically takes three to four months. Purchasing land and building often takes two years or more, from the time the land is acquired until the building is ready for occupancy. 

Cost: With most things being equal, it is not surprising that the price of a new building is higher than the cost of an older one. There are expenses that go into construction that have been paid for and discounted when purchasing an older structure; this needs to be considered when building. These “soft costs” include fees for the architect and engineers to provide site plans and building plans, as well as the cost of permits and inspections. There are also “hook up” fees and “tap fees” that you pay to the utilities to get power, water and sewer provided to your site.

Some of the hidden costs that are not obvious to a new buyer are the costs of current rules and ordinances. In 1980, the cost to develop a 1.5- to 2-acre site for a 30,0000-square-foot building with a gravel parking lot was about $10,000 per acre. Today with the requirement for retention ponds, green space, paved parking, storm drainage and setbacks from the road and other buildings, you now need approximately three acres to construct the same size building. 

Additionally, the cost of site development has skyrocketed, and you can expect to see numbers approaching $300,000 per acre to have a site cleared, graded and ready to start construction. Newport News values an acre of land in Oyster Point at roughly $250,000 an acre and the extra acre you need to build the same size building today comes at a dramatically higher price.

Perfect fit: There is a lot to be said for developing the building you need compared with trying to live in a building you buy. Going back to the earlier attorney’s office example, if the size of your typical office was 8’x10′ when your building was built, but your attorneys and staff need 12’x12′ spaces, it may be easier and less expensive in the long run to build what you need. Similarly, trying to remodel a building for your new brewery by raising the roof to get more ceiling height, changing to three-phase power to handle your electrical needs and increasing the sewer system capacity for cleaning the tanks may just be more effort and money than its worth. Putting together a facility that fits your current and anticipated needs up front can save you years of time and headaches down the road.

The bottom line: The choice between buying an existing building or constructing your own comes with a list of pros and cons unique to each line of business and the personality of the ownership. Considerations about your short- and long-term growth plans are critical in determining the size and type of building you need now, for the future and in a changing economy. If you can drag and drop your operations into a variety of shapes and sizes, your decisions about buying or building will be different from the user who needs specific requirements to succeed. The advice of trusted, experienced advisors is essential, and your lender, attorney, accountant and real estate broker should all have a seat at the table. 

1, 2. CoStar Norfolk MSA 3d qtr 2022

About Michael Shapiro 7 Articles
Michael Shapiro is director of commercial sales and leasing for Drucker + Falk, a Newport News company for 80 years with more than 3,000,000 square feet of commercial space and more than 34,000 apartment units in nine states under leasing and management.