Creative solutions to problem real estate are the domain of value added deals. These are buildings that after they are redeveloped will increase cash flow and operability. The simplest examples are adding more square footage to an underutilized land area or subdividing the building for smaller tenants at a higher per foot rent. Because building new is so costly, there is more attention being paid to reconfiguring older property.
As business changes, buildings need to adapt. The new breed of companies in the Trade Triangle – the area between Downtown markets, the Harbor and LAX – want convenience to labor, transportation and talent. These businesses are small, fast, and ethnically diverse. They trade and source on a global scale. Their products and services are information laced and branded; technology is a key component. Speed is a must. Close-in locations are required for physical interaction with customers, suppliers, and employees. A lot of the industrial building stock is left over World War II and later. These buildings served a different purpose than what is needed today. While many teardowns exist, the high cost of new construction makes reusing existing more economic sense. On a limited scale, a few developers have created some very successful prototypes, most notably in Culver City. Now the concept is spreading through the rest of Los Angeles.
Lighting, landscaping, additional windows, open offices, outside areas, new demising walls and flexible design are a few of the minor improvements. Total reconstruction will be the next stage of reuse. Buildings will become places instead of locations. In many cases these buildings will no longer serve traditional industrial purposes. Areas near cultural amenities like Asian influenced Gardena, Hispanic inspired Pacific Boulevard, or Downtown adjacent will have the most appeal. Creativity, lifestyle, bonding and deal-making are large components for new business models.
Sometimes these buildings are listed. Mostly they appear on quietly traded channels like a broker’s private mailing list or party-to-party direct deals. The computer multiples may be a limited source but it’s overwhelmingly a vehicle for user sales and leasing, not value added investor deals. Many of the best buildings are held by a fairly small, sophisticated group of investor developers and their advisers who truly excel at the real estate business. Mostly, it leaves intelligence, hard work, and a little luck as the primary method for finding properties to add value.
There are tools that the experts use. Financial models, site plan studies, extensive re-construction estimates, and market studies are a few. Each lease, credit, dimension, improvement, and repair is negotiated and scrutinized. Finally when owned, the best examples will be well managed properties with new signage, shared loading, good space dimensions, amenities, common areas, maintenance, and location. For all but the most seasoned professionals, the value added proposition is difficult because extraordinary skill and patience are required. Of course, the result is a testament to the deal maker. And for the experienced real estate person, the achievement is equal to the financial reward.