What is a Good Deal?
In commercial real estate investment, a good deal can look like anything. Whether it be a highly-marketed, newly renovated office building or an industrial building that could use some fixing up, with the right eye and approach, anything can be a good deal (even if it doesn’t seem like it at first).
I know what you’re thinking: how can you even compare a freshly renovated, in-demand office space with a shabby industrial building located in a lower-income area?
Sure, the flashy office building may be the safe choice – it’s recently been renovated (which means it won’t be too expensive to re-activate), it has already gained popularity in the market (which means it will probably be easy to sell), and all of your competitors can’t stop talking about it (which means they see the same potential for the building as you do).
But in commercial real estate, the safe choice is not always the best choice. Think about it: if there is already a lot of buzz about it amongst consumers and competitors, chances are, it is going to be Expensive (with a capital E)!
You are also underestimating your abilities when you think this way. After all, isn’t transforming mundane properties into sought-after workspaces, residences, storefronts, restaurants, and the like your passion!? With a little bit of creative problem solving and looking through a different lens, you will realize that every property has potential – as long as you identify its hidden value drivers.
Hidden Value Drivers in Commercial Real Estate
Hidden value drivers are the unique aspects of a commercial property that, although may not be obvious at first, are the key to re-activating a property and transforming it into a sought-after place to work or live.
We like to categorize hidden value drivers into three main buckets: physical factors, market-driven factors, and capital factors. Let’s dive into examples of these hidden value drivers and what makes each of them so unique.
Differentiating Physical Factors
Sometimes uncovering the hidden value drivers of a property involves rethinking the asset at a physical level. This involves looking at the physical infrastructure of the building or property and strategizing around the best way to leverage and activate it.
For example, perhaps the property has a central courtyard with a few tables and chairs, but currently, nobody uses it because the furniture isn’t very comfortable or inviting. This courtyard is in fact a differentiating physical factor – it just isn’t being used appropriately.
We might consider transforming this seating area into a fully-functional outdoor lounge area complete with a barbecue, fire pit, and comfortable furniture. This way, employees can have informal meetings outside, eat lunch while soaking up some sun, or just have a comfortable place to go when they need to take a breather.
Another hidden value driver in commercial properties that many people overlook is the potential for market growth. Perhaps the property is located in an area that may not be desirable right now but the community has plans to transform the area by adding more shops and restaurants.
The fact the property is in a less desirable area will turn many investors away. However, if you do your due diligence and research, you may discover that a community update is in the works. Not only are you more likely to acquire the property at a lower price point, but you are getting just ahead of the trends and growth path.
On the other end of the spectrum is re-activating the property in order to make the surrounding area more marketable. Let’s go back to the example of an industrial building in a lower income area above.
This may not look like a great deal at first glance – after all, it is going to take a lot of creative problem solving and investment, despite the lower upfront cost. However, what if you could transform this industrial building into an incubator for startup companies?
Startup companies are just looking for a place to get business done without having to pay too much. Turning a large industrial building into an incubator for multiple startup companies is not only profitable for investment companies, brokers, and building owners, but it is great for the area in general. Changing how a property is used has the potential to create a lot of value for that area.
However, there is one caveat to this. If you want to change the purpose of a building, it is important that you understand how to navigate the public sector. Familiarize yourself with how to get things up-zoned and how to obtain different permits in order to make the process as seamless as possible.
Who knows? Maybe that new incubator building spurred the introduction of coffee shops, restaurants, and residential buildings in the area – thus creating a more desirable, up-and-coming neighborhood.
Having differentiated capital is a huge advantage in the commercial real estate investment industry. Here’s how it works:
Typically, when a highly sought-after commercial property is up for sale, funds are raised by large investment banking companies, which in turn, creates a pricing bubble. These are the properties usually chased by the rest of the herd – which typically causes the price of the deal to skyrocket. Not cool.
But, like I mentioned earlier, we are looking for hidden value drivers. Therefore, if the herd is running away from a certain property and flocking towards another, it may be in your best interest to take a closer look at the property they are running away from, finding those hidden value drivers, and convincing other investors that they should invest in this project.
Having differentiated sources of capital not only allows you to get ahead of (and avoid) that pricing bubble caused by large investment banking companies, but you may have also just started a new trend in the industry.
Currently, creative office spaces are all the rage amongst commercial real estate investors. Wouldn’t it have been awesome to be the people who saw the potential of this space and capitalized on it early on (before the pricing bubbles began)?
All in all, the point I’m trying to make is that a good deal may not be obvious, and may even make you want to run in the other direction towards a “safer” option.
However, having the ability to see the hidden value drivers in a property when others can’t can help you uncover areas of growth and get just ahead of that growth – leading to greater profits, more rewarding projects, and some jealous competitors. What else could you ask for!?