Vacant Anchor Retail Space- Conversion Ideas
To all,
I have access to a 1.6M SF vacant national retail portfolio with average building sizes of ~100k. The buildings are in tertiary markets throughout the US in retail/commercial areas away from residential. I'm getting this dirt cheap, weighted average $30 psf. This is a significant discount to replacement cost. I legally restricted on what type of retail I can do, so I'm looking at converting the properties into Data Centers, Assisted Living, Self Storage, etc. What do guys think?
So you want to take the vacant anchor suite of a shopping center and build senior housing units in that space?
That's the question I'm asking you guys. I'm trying to figure out what to do with cheap bricks in tertiary markets.
I think there's a lot more you'd need to explain for anyone to give you a semi-decent answer.
What more do you need to know? I can't give specifics to this deal since it's an off-market transaction. I'm looking for a big picture take on what you do in tertiary commercial markets with a big box that you bought for dirt cheap. The retail cannot be replaced by a grocery over 35k sf, a pharmacy, a wholesale club, or a discount department store.
legally restricted to what kind of retail? Is the whole portfolio vacant, and these are single tenant assets? Or multi-tenant sites and all units are vacant?
The portfolio is comprised of 10 different big box spaces spanning 10 states in tertiary markets. For example, I would be buying a portfolio of 10 vacant Home Depots buildings.
The first thing I would do is try to lease the vacant space out to retailers, preferably big box retailers. If you have substantial TIs then you'll need to fund it with cash equity or debt. Self storage is an interesting idea, but it's really an area of real estate that you need to have a level of expertise at in order to be successful--it's a surprisingly complicated field.
If the markets can handle the supply, self storage. Cheap build cost (assuming here, have only done light work with self storage) and would presumably be easy to convert back to retail if your tertiary market recovers and a big anchor tenant wants in. Only problem with self storage is that most good markets for it are pretty saturated.
also assuming these buildings are freestanding. might make it a bit more difficult if they have strip retail connected.
Self storage isn't as confusing as you would think, Maybe to lend on (which may be where you are coming from DC), but the operational economics are pretty straightforward. Most of these things tend to run pretty high occupancy and you just have to make sure you have the right mix of cooled / non-cooled units, unit size mix, etc. to make sure you have the right supply mix for your market's demand.
Also, you'd be surprised how easy it is to go find out what the other operators are doing in the area. People are pretty willing to give you all of this information (have underwritten storage centers from a loan acquisition perspective)
Self storage is ALL market driven. You can't just set up a self storage unit anywhere you want and assume that you profit. If that were the case then you'd have self-storage units saturating rural areas.
Depending on the market, building self storage units can be fantastically expensive, especially when you are building elevators and heating/cooling systems for each individual unit. The idea that self storage is cheap tp build and easy to manage is somewhat preposterous if done properly. Maybe bumfuck, Indiana won't have a lot of code standards or demanding standards from customers, but those are the types of markets that probably already have a ton of self-storage.
sorry, what is your definition of cheap in relation to?
sorry, let me clarify, can you tell me a cheaper alternative use? Knock it down for a christmas tree lot?
"The retail cannot be replaced by a grocery over 35k sf, a pharmacy, a wholesale club, or a discount department stor"
In my market, several older centers have anchor space occupied by branches of some of the local mega-churches.
Without knowing anything about the properties, have you considered industrial? Depending on column spacing, clear height, etc. you might be able to repurpose to light manufacturing, flex, or distribution (long shot).
Fitness center might also be a good use for some of the big box brands out there.
It would be tough to find a credit gym tenant for these areas. In addition, if I were to get a local guy that means sacrificing cap rate contraction due to bad credit.
Don't want to sound like a downer, but based on what you've said so far, maybe there's a reason you can get it dirt cheap...
Trampoline parks, obvi.
Assisted living is impossible, there are so many legal requirements in play. Self storages golden period was gone several years ago, too much saturation. You'd be better off investing some TIs, giving a ton of concessions and leasing it back up. Data centers are possible, but I hear TIs are huge here. Industrial facilities are good depending on proximity to highway, also will need ease of access for loading and unloading. Honestly I don't know if $30 psf is great, if you can't truly find retail tenants to lease there. The TIs alone could run you a $100+ psf if your looking to bring in an attractive credit quality tenant.
Agreed with assisted living. Also, not the areas where AL would make any sense. Self-storage makes sense in certain markets and I believe these tertiary areas are where you can still make a deal. Data centers are crazy expensive, require a lot of energy (systems must be in-place) and primarily away from civilization, which these properties are not. Retail won't work because of the legal restrictions that I mentioned in previous posts. I was also thinking about a call center since the areas are pretty densely populated.
Maybe even a distribution center for those locations that fit.
Do you have pad area that you can turn into strip retail? Your parking requirements may have room for it since the main big box guys like to have giant parking lots, above requirements. This will probably be soft in outlying areas because of pre-recession overbuilding, but if demand picks up, it's a good upside story. If it's in a place with good demographics, that parking lot might have value for a fair bit of redevelopment, depending on what the comprehensive plan has slated.
The other thing is the cities in which they are located, can you get some kind of incentive for redeveloping the property? If it's an empty big box where they used to have a retailer, they may pitch in something or give you a property tax rebate for jobs/sales tax revenue.
There is definitely a surplus in parking because it was previously occupied by a big box tenant. My group doesn't do development so we have not considered that option. I honestly don't believe there is any (re)development play for these assets. Once again, retail is tough because of the legal restrictions.
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