The real estate industry is very much like professional baseball when it comes to the aging and relevance of existing properties. All holdings and property values have a shelf life due to aging structures, advancing technologies, revised efficiencies, and changing market conditions. No property will last forever. But they can be reinvented like some world-class athletes are able to.
Last month I was catching a Tigers game, watching a 37-year-old Miguel Cabrera strike out against a young Kansas City Royals pitcher. It was hard watching this premier athlete in his prime struggle to play at a high level. His age, physical wear & tear, stronger competition and years of mental grind have all taken a toll on this once great baseball player. It's always satisfying to see a struggling player make a few changes to their game that allows them to continue playing at a high level for a few more years. When I was younger, I remember going to an Indians game where I saw Dennis Eckersley, as a starter, throw a no-hitter against the California Angels. (Now I am dating myself!) After a few years of starting, Dennis converted himself into a full-time reliever by learning to pitch a wicked slider and became one of the greatest closers in baseball history. Dennis had the wisdom and foresight to know that he needed to re-imagine himself to continue his baseball career.
With over 50% of all commercial buildings being constructed before 1980 and a glut of retail space, caused by the pandemic, a slew of considerations has popped up surrounding the possibility of re-imagining assets. It’s not uncommon to hear about converting office properties to multi-family units, repurposing regional malls as distribution facilities, or the unfortunate decision to raze an obsolete property.
As numerous older buildings begin to hit the market in the next few years, how should a potential buyer evaluate the associated risks and rewards of re-imagining an asset and what the impact will be on its value?
The three main types of obsolescence that should be considered are: 1) Physical; 2) Economic, and; 3) Functional.
Physical Obsolescence is the deterioration of a property due to wear and tear. Items that fall under this definition include structure, roof, siding, HVAC systems, mechanical systems, parking lots, plumbing and sanitary/storm sewers.
Economic Obsolescence is the loss of value due to factors that are external to the property. Some examples include change of driving patterns, shifting trade areas, areas with rising crime rates, demographic changes, and competition. It’s well known that malls are coming head to head with economic obsolescence. Guggenheim Commercial Real Estate recognized the rising trend for online shopping that forced Macy’s to close its door at Richmond Town Square Mall in Ohio. With the ongoing reimagining of malls, this asset was no different, reimagine or become obsolete. We ultimately successfully leased the space to CubeSmart, a self-storage facility.
Functional Obsolescence is the reduction of a property's usefulness or desirability because of outdated design features that are not aligned with market tastes or standards and cannot be easily changed. Examples include inadequate floor plans, (this is of particular importance as a result of the social distancing measures instituted as a result of COVID-19), older technologies (no access to usb ports, wi-fi). It is difficult to quantify the effect of functional obsolescence because it is mostly subjective. There is no looking back, evolving technology trends, shifting geo-political uncertainties, macro and micro demographic patterns, and unforeseen national and global crises are all societal realities of life. The only constant in life is change. Real estate is no different. Like other historical markers that defined a generation, this period provides real estate professionals with a unique, once in a lifetime opportunity to re-imagine what the future of land use should look like.
Some of the areas that you can have a deep impact on re-imagining your properties are:
Zoning- Many municipalities are reviewing and modifying zoning codes and maps with the intent on updating master plans that incorporate future visionary trends. You can take a proactive role in shepherding these changes.
Credit- As professional real estate practitioners, we should be focusing on acquiring high credit, and financeable growth tenants. Some examples in the retail sector include; Kroger, Publix, Walmart, Target, Amazon, Sherwin-Williams, and Dollar Tree. We had the opportunity to transform a vacant HHGregg space. Economic factors forced the company to move to an online only retail model With an average size of 25,000 – 30,000 square feet and big box retail taking a hit in the last 10 years, it was up to Guggenheim to reimagine the space or face economic obsolescence. By thinking outside the box, the 31,000 square foot property was leased to Waterway, a nationally recognized leader in the car wash industry. Our team avoided an asset from becoming obsolete and also added value by providing ownership with a profitable tenant in a large retail vacancy.
Demographic & Market Trends- Make sure you study and understand categorical shifts in consumer spending, population movement and consumer trends such as the growth of drive-thru’s, curbside pick up, social distancing and home delivery, for instance.
Redevelopment Costs- With the disruption of supply chain, it is vitally important to anticipate
increased costs of raw materials, delivery and labor.
Professional sports teams face these challenges with their holdings - stadiums. When considering what to do with aging arenas, the teams face the same challenges as ball players when it comes to transforming themselves. First they need to take the time to imagine how a different playing style, or a new position, or even a completely new sport might look for them. The Chicago Bears went through this at Soldier Field. The stadium’s bones were retained, but it was updated to accommodate the new realities of spectator sports. The Minnesota Twins took a look at its aging Metropolitan Stadium and decided that it was time to retire the old park and redevelop the land it sits on into a more profitable shopping mall - The Mall of America.
Even in the toughest times, sports teams have not taken a seat on the sidelines. They realize that they must change to remain relevant and profitable in these challenging of the times. They have taken the time to reimagine how to deliver sports entertainment in completely new ways. Use this example and take a proactive approach to your aging properties and start to reimagine how to make them relevant again.