A good commercial real estate investor has an in-depth knowledge of their market, focuses on a particular niche and makes sure they know everything about that niche and adjusts their businesses to minimize risk. But in order to reap reward where others fail, a great investor distinguishes himself by thinking outside of the box in order to find value where others do not.
Thinking creatively about how to add value, particularly with distressed properties, can be done at each stage of the deal. For example, before sealing the deal on a riskier property, a savvy investor will use some form of contingencies in order to determine the feasibility of increasing value. Other investors prefer to choose neglected properties in good locations that require a few cosmetic changes to increase their curb appeal.
These are all valid methods that go a significant way to increasing potential profits. But the investor who goes a step further and considers alternative uses that fill needs unique to their geographic markets will be able to increase profits not just for one property, but for an entire property type located in the same area.
The practice of converting industrial warehouses into apartments are the most common type of re-purposed property. What is new, however, is the increasing trend of converting industrial complexes into mixed-use buildings that offer a live-work-play environment for residents.
These developments offer more than soaring ceilings and ample space. With tenant amenities that include flexible work spaces, electronically monitored storage boxes for postal deliveries, and communal spaces designed so residents can gather together, buildings like these require creativity and forethought in order to ensure they work well.
But truly forward thinking investors examine distressed properties with an open eye, finding truly creative ways to retrofit or revitalize distressed or abandoned spaces in unusual ways.
Converting Condos To Rentals
At first glance, condominiums are not the best investment property type for serious investors.
Although the initial cost is less than other commercial property types due to their size, there are numerous add-on costs that cut into net profits. Monthly association fees for extras like exercise rooms, pools, and advanced security systems can be anywhere from several hundred to several thousand dollars.
There are also an inordinate amount of rules that can not only prevent you from doing the renovations you’d like but also decide whether or not you can even rent your property. And lastly, the lower NOI (from the abundance of vacant properties that are exactly like yours) and difficulty getting financing have turned many investors away.
However, some persistent investors are converting condos to rentals by terminating condominium ownerships. While not an easy process, in some states recent laws have made this easier to accomplish. By converting condos into rentals, investors can take advantage of the growing pool of Americans who are renting instead of buying, as well as the lower insurance rates.
The owner of Sunset Lake Villas in Florida did exactly that several years ago when he converted the Class B property to rentals. Although getting 80% approval from other owners wasn’t easy, an assessment which revealed property values had plummeted to just 30% of the original value was a strong motivator. Unable to make the loans or get re-financing, the conversion was the only way to salvage the situation.
Between the rise of freelancers, who are expected to make up 50% of the workplace by 2020, and the rapid growth of businesses with less than 50 employees, the demand for non-traditional, flexible working spaces has grown dramatically. In just a few years, companies like WeWork, Regus, and Industrius have grown exponentially. WeWork, for example, is now valued at $15 billion.
But co-working offices is not just for freelancers: a growing number of big businesses are starting to take up the trend as well. Aside from employees who say co-working spaces boost creativity, the financial incentive of being able to control real estate costs while expanding into new markets has made co-working spaces an attractive option.
If there is any space to be found in a city, most highest and best-use scenarios would suggest just about any kind of commercial property would be the better choice than raw land.
However, there are places nationwide where low property values, a preponderance of older buildings, and low-income mean land is cheap and available. These depressed communities are often not far from trendier areas populated by a growing demographic known as “foodies.”
Foodies are food connoisseurs who in addition to celebrating food, strongly believe in using locally green produce that is organic, pesticide free, of excellent quality. Investors catering to this segment have stepped in to satisfy a need for fresh food by capitalizing on these unlikely urban spaces as ideal for growing specialty foods.
Foodies are a lucrative group, as they are passionate, knowledgeable, and most importantly – well off enough to spend in order to indulge their need for fresh food.
And surprisingly, this demographic isn’t limited to gateway cities like New York or Los Angeles.
Detroit, Newark, Brooklyn, Chicago, Philadelphia, and Washington, D.C., are all home to foodies of all ages. There’s even a term for food connoisseurs who prefer local food: locavores.
And while these operations are smaller than the mega-farms of traditional agribusiness, they can still be quite large. One New York City business, for example, produced more than 300 tons of vegetables last year, while in Chicago, a local business sells nearly a million pounds of herbs and salad greens to specialty stores and restaurants.
From Shopping Mall To Artists’ Colony
The new owners of a struggling shopping mall in St. Louis planned on demolishing the property when they acquired it. Instead, the recession led to a record number of vacancies and left the owners in a bind. In order to salvage the situation, a leasing agent suggested inviting artists to rent storefronts at reduced rents.
What started out as a whim ended with a space that won the prestigious MAXI award for public relations, was named 2009 Best Mall of St. Louis by a local newspaper, and covers nearly half of the mall space. And although the new owners still plan on demolishing the mall, the artists’ center will play a role in the new development.