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Small Business Digest


Small Firms Need To Move Alertly As Real Estate Economics Go Into A Tailspin

Small businesses need to move alertly if they are not going to get caught in the real estate bust that is now occurring.

Reports from across the nation indicate that smaller firms are being bombarded with offerings on office, factory and distribution properties. 

The renewed activity is the result of the credit squeeze affecting not only the housing market but commercial properties as well.

Many diversified builders and property managers are seeing a softening in the commercial property arena.

As a result, they are offering smaller businesses what appear to be attractive deals to expand their facilities at a time when the economic outlook is at best, fuzzy.

At the same time, landlords with expiring leases are trying to lock in increases in the final quarter of this year in anticipation that rents may decline further in 2008.

Smaller firms that are growing are encouraged to look around if their landlord comes in with a higher lease rate.

The combination of pressure from lenders to improve cash flow from existing buildings makes looking around a worthwhile use of time.

The downside is that rents may be lower next year in many parts of the country.

In either case, small firms may feel squeezed and pressured to do something as the real estate industry goes into free-fall.

However, there is a bright side to this as economist Dr. Kenneth E. Lehrer points out.
“With mortgage rates essentially flat and not going up that much, it might be a good time to switch from a rental situation to a ownership position.”

“Retailing in switching from bricks-and-mortars to online marketing and there will be opportunities in that area,” the Houston, TX economist said.

“However, it is important for smaller companies not to over extend themselves when a deal comes through that can add value to the operation,” he added.

Surveys by this newsletter’s parent, Information Strategies, Inc., reveal a growing desire for service companies to grow out of their current spaces as prices for commercial spaces have come down in many parts of the country.

“We’re seeing a movement away from the idea of a “shopping trip” to an online search,” Lehrer said. “For consultants and others, the trend to virtual companies continues but we are seeing an expanding desire to consolidate operations by smaller firms as they move beyond the one-to-nine employees.”

Locking in a long-term lease with good incentives to bring together every employee makes sense but needs to be tempered by a realistic analysis of the firm’s financial situation.

“Getting a good deal now can mean significant positive impact on the bottomline stretching out over five years,” Lehrer said.

Helping this transition is the fact that communication costs are down and other expenses can be held low by judicious planning.

Lehrer warns however that moving expenses and other costs can hit the company hard in the first year.

Commercial real estate owners are finding it more difficult to fund their efforts and they want to strengthen their cash flow,” he said.

“Just don’t let them do it at the expense of your own firm’s growth,” he added.

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