The Adaptive Reuse Of Big-Box Buildings
It is no longer, “the best kept secret in real estate,” according to Jeffrey Shouse, national director of self-storage appraisal for Colliers International. In his latest industry newsletter, Shouse says, “Comparing overall returns on a five- and 10-year basis, self-storage has outperformed apartments, retail, industrial, and office investments …”
While self-storage remains a niche asset class among the major property types, more and more institutional money is finding its way into the self-storage industry sector. This includes Wall Street investment bankers, insurance companies, hedge funds, and major retirement funds to name a few.
Certificate Of Occupancy
With the exception of multi-family, capitalization rates for stabilized self-storage assets are below those of every property sector. One impact of the Great Recession was a stifling of most new development for the past five to six years. The mom-and-pop developers of the industry are cashing in and being replaced by experienced “merchant builders”. A merchant builder is experienced and well staffed. They understand the development process intimately; they can construct a new project or renovate an existing building and then either deliver it to an established operator or stay in the deal as a joint venture partner for some period of time.
Merchant builders no longer have to wait three to four years for the facility to achieve stabilization to receive a return on their initial capital outlay. They are delivering “Certificate of Occupancy” deals to the publicly traded companies and larger operators who have access to capital/equity partners. With cap rates as low as they are right now, and with the larger operators able to shorten the traditional lease-up period to 24 from 36 months because of their Internet analytics prowess, many merchant builders are choosing to sell the completed projects at Certificate of Occupancy (C of O) rather than staying in the deal.
I started my self-storage career some 30-plus years ago in the corporate real estate department of the industry leader, Public Storage. I began by locating sites for new projects and working through each aspect of the development process. Today, I use the same parameters for feasibility analysis. I know how to recognize a good site from a bad one and can make reliable predictions as to whether a project will ultimately be economically viable.
Make no mistake, there is a huge opportunity, in this economy, for experienced brokers to help their clients re-position existing, non-performing retail or industrial buildings into self-storage facilities or, in the alternative, to sell the building to a buyer who can accomplish the adaptive reuse of the property into a viable self-storage facility.
The properties I encourage developers to look at are “functionally obsolete” buildings that can no longer be used for their originally intended purpose. They may be older structures that need to be released from a fund or company that has had a change in corporate direction and no longer has a need for that particular property or location.
While this process of adaptive reuse has been more prevalent in the top-tier markets with urban “in-fill” locations, it is now beginning to make sense in the secondary markets (one million people or more) as well. Rather than an outright sale, owners may now have other options for their existing vacant, fully depreciated, or underperforming properties. For example, an owner can “contribute” his property to a new joint venture either with an established self-storage operator or a merchant builder who will redevelop the obsolete building into an income producing asset.
The owner of the property can choose to 1) stay in the joint venture until the end of the construction and the JV partner obtains the Certificate of Occupancy; 2) remain in the JV until the property has gone through the lease-up phase (two to three years) and stabilizes; or 3) continue in the deal until the next re-financing and/or the sale of the asset at some future date. Many will recognize that this is a savvy estate planning tool for certain investors and families. For corporate America, this is another method of turning a non-performing, excess, real estate inventory into income producing assets.
Is It Feasible?
Keep in mind that you can’t take any old industrial building or vacant retail center and redevelop it into a sustainable self-storage facility. Recently, I worked on a consulting assignment where I was hired to participate in the evaluation of a portfolio of 350 “industrial” properties owned by a New York stock exchange company. My assignment was to determine how many of their company-owned properties might qualify for conversion to self-storage facilities.
At the end of the day, without any study of the competition in the primary trade areas or any consideration of the costs of adaptive reuse, we deemed that only 20 percent of their portfolio might qualify to become self-storage properties. Furthermore, upon personal, physical inspection of these properties, we disqualified almost 50 percent of those remaining properties. To take the next steps the owners will need a professional feasibility study. Broadly, this study will define the primary trade area, study the supply/demand characteristics based on the competition, and determine the economic feasibility of the adaptive reuse of the project.
Generally speaking, a property of 300,000 to 400,000 square feet is just as unacceptable as a building that is tucked away in an industrial park with heavy industry or manufacturing. Ideally, self-storage requires a site that may be zoned industrial but has a “retail” presence.
The most obvious retail adaptive reuse example is a closed free-standing Walmart, K-Mart, Target, or grocery store. Many of these stores have been replaced in the same or nearby market with larger, improved superstores or perhaps the market has been abandoned entirely. Once deserted, these stores can become an eye sore for a community—graffiti, broken windows, weeds in the asphalt, and all. What better opportunity than this for the self-storage developer who recognizes the opportunity to create an in-fill location in a neighborhood that was previously restricted due to a lack of land or an available properly-sized structure.
If you find such a diamond in the rough, the main building can be converted to climate-controlled units and typical single-story, drive-up units may be built on the no longer needed parking lots. If fact, this past year, a national self-storage operator bought a vacant, former auto dealership in Shaker Heights, Ohio. The result was an award winning facility that was recognized for the outstanding conversion/adaptive reuse of the property. Indeed, there’s no better time than now to think outside of the box!
Nicholas J. Malagisi is the national director of self-storage for Sperry Van Ness Commercial Real Estate Advisors and managing director for Sperry Van Ness Commercial Realty.