Guest post by Dan Brown President, Brown Commercial Group, Inc.
Private investors have moved back into the suburban industrial market in force, drawn by improving fundamentals and the chance to get in as the market cycles upward.
Buildings in the 20,000- to 75,000-square-foot range are particularly attractive, as they offer a lower entry point that is appealing to small- and mid-sized investors. Many investors also are looking for “value add” properties that need renovation or repositioning.
The key to success in today’s investment market is to focus on tried-and-true fundamentals. Well-located properties will always offer greater opportunities, as they provide stability from a leasing and financing standpoint. Buildings with taller ceiling heights and other structural features that add flexibility for future tenants also are important.
When focusing on value-add properties, investors should have a solid plan for making the improvements—and know their time horizon for selling.
Properties that need superficial upgrades—such as new signage, landscaping and interior finishes—are the most desirable. These types of changes allow the new owners to create a fresh look with projects that are easier to estimate and contain financially. These are relatively easy projects to manage and fund, and the chances of finding significant surprises are limited.
Properties that require substantial structural and mechanical upgrades come with more risk because of the added investment and potential for surprises. These types of projects also require a longer construction cycle, which can adversely impact efforts to re-tenant the building and improve occupancy.
In either scenario, investors need to understand what tenants want in a building, today and in the future. Features such as ceiling height, truck parking, dock space and column spacing should be considered carefully as part of the decision to purchase the property. Does the building have the structural features tenants want? Is it possible to add them economically?
As investors evaluate properties for their value-add potential, they also need to look at their time horizon. A well-thought-out exit plan is a critical part of an investment strategy.
Many investors today are buying for a seven- to 10-year period, as they are looking for an improving rent roll and the opportunity to build value as the market improves. Investors should look for well-located properties with some long-term tenants and core structural elements that allow for remodeling and repositioning. In some cases, investors can take on more risk from a higher vacancy, as they have more time to reposition the property.
Brown Commercial Group, Inc. is a privately held commercial real estate company in Elk Grove Village,Ill., specializing in leasing and selling industrial, office and investment property, and assisting clients with land acquisition and new construction projects. Dan Brown, president, can be reached at firstname.lastname@example.org.