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Every small business will reach a stage where it's thriving enough to have outgrown its current space. Once full of potential, the cramped office will feel limiting in a good way.
It's like a small boat now ready to transform into a large vessel that can voyage on the vast oceans. The company must expand into newer, lucrative markets, which may require relocation.
The reasons may vary, but over the past five years, more than 90% of North American companies have relocated production and sourcing. Are you planning the same but don't know what to do with the commercial property you own?
This article will help you decide. We will discuss three critical factors that tell you whether holding or selling your property before relocating is better.
Market Conditions
The first essential factors are the current market conditions or macroeconomic trends. This means you must consider the economy broadly before deciding whether to sell the commercial property.
Investopedia suggests looking at variables like unemployment, inflation, and the Gross Domestic Product (GDP). In light of these, check if current commercial property rates are skyrocketing, just above the horizon, or declining. High buyer demand and low inventory point towards increased sale prices.
Holding the property until the market recovers may be wise if the price trends are soft. To dissect this further, you can look at the following to get a better idea of a high-yielding macroeconomic environment -
- Interest rates - This sub-factor directly impacts buyer demand. You can consider selling your commercial property when interest rates are low, which would motivate investors to purchase due to cheaper financing options.
- Employment trends - Again, there is a direct correlation between buyer demand and positive employment trends. Higher employment would drive up the demand for office space. Such a demand puts upward pressure on commercial property values.
- Sector-specific momentum—Certain industrial sectors displaying significant growth can make buyers compete for properties in strategic locations. Some cities become magnets for capital during peak growth periods.
You cannot decide based on a single factor or sub-factor. Analyze whether the current market conditions favor you from a 360-degree perspective.
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Future Growth Potential
Business owners, both literally and figuratively, cannot just think about the present. They must consider the future as they dwell in the now. In other words, even if current conditions seem like a seller's market, how do they compare against the expected future?
Let's say you own a commercial property in downtown Denver, Colorado. This area is the heart of the city's business activity and is home to major law firms, tech companies, and other office buildings.
On the other hand, you are given access to a broader market in Manhattan, New York. The unmatched exposure and business scaling opportunities can be hard to resist. However, it's also a big leap because of ruthless competition. Manhattan is among the top 10 places in the US with the highest cost of living.
Given how exorbitant commercial real estate can be in Manhattan, it makes little sense to sell the property in Denver immediately. Moreover, Denver is rapidly growing in terms of businesses looking for local impact.
Manhattan carries a higher reward potential in the present, but the entry is often steeper and full of unforeseen risks. Getting a Manhattan office space for lease would make more sense, especially until your transition has stabilized.
The Farm Soho shares that Midtown Manhattan and surrounding Grand Central Station are prime business locations. You can easily lease a private office, co-working space, or an exclusive floor for your team.
As you try to scale your business in a dog-eat-dog world, use your commercial property as a satellite location. That's a great way to maintain local client relationships. Plus, you can see lucrative returns, considering the location has immense future potential. If not, sell it and start anew in the new city.
Tax Implications
Another factor that highlights the importance of debating whether to hold or sell commercial property is capital tax gains. Whenever a commercial property is put on sale, it attracts capital gains tax, which is levied on the profits gained from the sale of any capital asset.
Remember that the tax implications may vary depending on the duration for which the asset was held. The longer you've owned your commercial property (over a year at least), the more favorable the long-term capital gains tax will be.
This implies that you'd make a financially wise decision by holding the property longer. Besides, the depreciation recapture rate is also something to be aware of.
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Over the years, you would have availed of depreciation deductions to lower your taxable income. The Internal Revenue Service (IRS) requires the depreciation to be recaptured at 25%. This recapture can significantly reduce the net proceeds of your sale.
So, you must also factor it in for an accurate financial analysis. If you wish to hold the property, you can enjoy benefits like continued depreciation deductions for mortgage and operating expenses. Moreover, it may help you capitalize on future market appreciation to offset tax liabilities.
Likewise, selling may be beneficial if you decide to reinvest the sale proceeds in buying another like-kind property in the new city. It will make you eligible for the 1031 exchange, which allows commercial property sellers to defer paying capital tax gains or depreciation recapture.
However, you must ensure two things. First, you must have an attractive replacement property lined up. Second, you must ensure your sale's timing aligns with the strict IRS guidelines for a 1031 exchange.
The three factors discussed are critical for holding/selling commercial real estate. A fourth factor, investment goals, may apply in some cases.
For instance, consider holding the property if your investment goal is to generate a steady income. This will help you make rental income. By comparison, if the property aligns with your broader portfolio diversification strategy, it's best to sell it and balance off the risk.
All these factors must be considered together for an informed decision. The bottom line is always balancing current performance with future potential for sustainable business success.
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If you’re planning a move from Colorado to Manhattan and need a reliable real estate agent in your new location, Kenna Real Estate Group is here to help. Thanks to our extensive network of trusted professionals across the country, there's a good chance we can connect you with an agent who will provide the same exceptional service you’ve come to expect from us. Contact Kenna Real Estate Group today, and we'll ensure you're in good hands as you transition to your new home.