Owning a warehouse is occupying it plus investing in it. Price the investment, and leasing usually wins for an occupier with an equity-like cost of capital.
Buying a warehouse is cheaper than leasing it only if the property's own return beats the occupier's cost of capital. On an illustrative 20,000 m² warehouse let at 90 per m², bought at a 5.5 per cent yield and sold after 15 years at 6.0 per cent, owning returns 6.61 per cent a year. Against a 9 per cent cost of capital, leasing costs 16,681,488 in present value and owning 24,004,306, so leasing is cheaper by 7,322,818, about 45.42 per m² a year.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Owning a warehouse is two decisions in one: occupying the building, which the business has to do either way, and investing in it, which it does not. Remove the first, and the second is a property investment with an entry yield, rental growth, capex and an exit. The question is whether that investment beats what the same capital earns in the business.
| Input | Value |
|---|---|
| Area | 20,000 m² |
| Market rent, year 1 | 90.00 per m² (1,800,000) |
| Rental growth, every year | 2.5% |
| Purchase net initial yield | 5.5% |
| Purchaser's costs | 6.8% |
| Structural capex an owner bears, year 1 | 4.00 per m² (80,000) |
| Holding period | 15 years |
| Exit yield, older building | 6.0% |
| Sale costs | 2.0% |
| Occupier's cost of capital | 9.0% |
The lease is full repairing: the tenant pays rent and keeps the building in repair. An owner pays the same repairs plus the structural and roof capex a landlord would otherwise fund, and gets the residual value at the end. Rent and capex are paid annually in arrears; both grow at 2.5 per cent.
Net price = rent ÷ NIY = 1,800,000 ÷ 5.5% = 32,727,273
Gross price = 32,727,273 × 1.068 = 34,952,727
The 2,225,455 of purchaser's costs is spent on day one and never comes back. On the gross price, the entry yield is only 5.15 per cent.
Leasing costs fifteen years of rent, 32,277,468 in total, rising from 1,800,000 to 2,543,353. Discounted at 9 per cent, that is 16,681,488.
Owning costs the gross price, plus 741,399 of capex in present value, less the sale proceeds. In year 15 the rent the building would command is 2,606,937; at a 6.0 per cent exit yield and after 2.0 per cent sale costs, the building sells for 42,579,966, worth 11,689,820 today.
PV own = 34,952,727 + 741,399 − 11,689,820 = 24,004,306
NPV of buying instead of leasing = 16,681,488 − 24,004,306 = −7,322,818
In Excel, with year 0 to 15 cash flows of buying instead of leasing (−price, then rent saved less capex, plus the sale in year 15) in B2:B17: =B2+NPV(9%,B3:B17) for the NPV and =IRR(B2:B17) for the return on owning.
Spread as an equivalent annual cost with the 15-year annuity factor of 8.0607, leasing costs 2,069,487 a year, 103.47 per m², and owning 2,977,947, 148.90 per m². The gap, 45.42 per m², is 50.5 per cent of the year 1 rent.
The incremental cash flows of buying (pay the price, save the rent net of capex, sell at the end) have an IRR of 6.61 per cent. That is the break-even cost of capital: any business whose capital costs more than 6.61 per cent destroys value by owning this warehouse, however permanent its occupation.
| Cost of capital | NPV of buying | Cheaper option |
|---|---|---|
| 6% | 2,259,043 | Buy |
| 7% | -1,361,553 | Lease |
| 8% | -4,535,020 | Lease |
| 9% | -7,322,818 | Lease |
| 10% | -9,777,329 | Lease |
The return on owning is driven by entry yield plus growth, less what is lost on costs and exit yield expansion. Each lever moves it by less than a point:
| Variant | IRR of owning | NPV at 9% |
|---|---|---|
| Exit yield 5.5% (no ageing discount) | 7.01% | -6,260,108 |
| Base: exit 6.0%, growth 2.5%, 15 years | 6.61% | -7,322,818 |
| Exit yield 7.0% | 5.92% | -8,992,793 |
| Rental growth 1.5% | 5.62% | -9,799,799 |
| Rental growth 3.5% | 7.60% | -4,541,355 |
| Hold 10 years | 6.03% | -6,902,299 |
| Hold 25 years | 7.05% | -7,859,426 |
Even with 3.5 per cent rental growth every year, owning returns 7.60 per cent, still short of 9. A longer hold helps the return, because purchaser's costs are spread over more years, but the NPV at 9 per cent gets worse: the business is locked into a sub-9 per cent investment for longer. For most occupiers with equity-like costs of capital, the answer is to lease and put the capital into stock, automation or customers.
The answer flips for businesses with a genuinely low cost of capital (a utility, a public body, a family company with no better use for cash), when the building is so specialised that no landlord will build it at a reasonable rent, or when the occupier expects to capture yield compression a landlord would not price in. Each of those is a reason, not a default.
The usual board slide sets year 1 rent of 1,800,000 against interest on a loan for the whole price: 34,952,727 at 5 per cent is 1,747,636, so buying "saves" 52,364 a year from day one. Discounting the full cash flows at the 5 per cent debt rate tells the same story, an NPV of 6,399,019 in favour of buying.
Both apply the debt rate to everything. No lender finances the whole price of a warehouse, and the equity in the building is capital the business no longer has for anything else. The occupier's own debt capacity is consumed by the purchase too. The comparison that matters is the property's return, 6.61 per cent here, against the business's cost of capital; a landlord with a 6 per cent hurdle is pricing the same building more cheaply than a 9 per cent occupier can own it.
A fair objection: the rent saved is a fixed, debt-like obligation, so textbook lease-or-buy analysis discounts it near the borrowing rate, and keeps the higher rate for the risky residual value. Done that way, the rent saved net of capex is worth 20,870,055 at 5 per cent, the sale is still worth 11,689,820 at 9 per cent, and buying has an NPV of −2,392,852. The gap narrows, but leasing still wins; the full NPV at the debt rate only turns positive because it treats the exit value as if it were as safe as a bond.
Tax changes the absolute numbers (rent is deductible, buildings attract capital allowances in some jurisdictions, gains are taxed at exit) but rarely the sign when the gap is this wide. Run the comparison after tax for the decision paper, at both rates, and show the IRR of owning beside the hurdle.
The same arithmetic, seen from the other side, is why a sale and leaseback can be cheaper than a mortgage, and net initial yield with purchaser's costs shows where the 5.15 per cent comes from.
Price the purchase as an investment: entry yield on the gross price, rental growth, capex, exit yield, costs. Its IRR, 6.61 per cent in this case, is the cost of capital below which buying wins. Above it, lease the warehouse and keep the capital for the business. Logistics and Industrial Real Estate sets out the investment case for warehouses, and the free workbooks for the book carry the rent and valuation arithmetic behind it.
It depends on the business's cost of capital, not the mortgage rate. In the illustrative case, owning returns 6.61 per cent a year after purchase costs, capex and sale. A business whose capital costs 9 per cent pays 45.42 per m2 a year more by owning; one whose capital costs 6 per cent gains 2,259,043 in present value by buying.
Because no lender funds the whole price, and the equity tied up in the building is capital the business cannot use elsewhere. Discounting at the 5 per cent debt rate makes buying look 6,399,019 better than leasing; at the 9 per cent cost of capital it is 7,322,818 worse. The property's own return, 6.61 per cent, is the break-even rate.
It raises the return on owning, because purchase costs are spread over more years: 6.03 per cent over 10 years, 6.61 per cent over 15 and 7.05 per cent over 25 in the illustrative case. But if that return is still below the cost of capital, a longer hold makes the NPV worse, from -6,902,299 over 10 years to -7,859,426 over 25.
This article is one calculation from Logistics and Industrial Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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