High vacancies properties - Opportunity or Disaster?

Question

Does anyone here deal with commercial tenant properties (office/retail/industrial) that are distressed, non-performing, or otherwise high vacancy? I think there's a lot of upside in these properties if they can be bought based on their current income stream because there is room to add tenants, thereby increasing the NOI and appreciating the building.

Any discussion on these types of properties is welcome. I'm especially curious about how to seperate the good prospects that can be changed around from the bad ones that are unfixable.

Account Closed · Answer

The value play can work if you have some experience and cash. The most successful one I have been involved with is a client that purchased a 156 unit apt bldg. They were able to reconfigure 30 2 bed units to 3 bed units without having to add any square footage. They increased rents $150 per unit thereby increasing the value of the bldg substantially.

Know your market, know the market rents and be aware of the absorption rates in your area or target area.

Josh Layhue · Answer

I don't know the entire story, but I know Trump spoke of buying a distressed property that turned out well for him.  Supposedly the building had very few tenants (and bad ones at that) because there were crime problems in and around the building.  Trump hired a security company to clean the place up and patrol it to make the place safe.  Then, cleaned up the existing apartments and fancied them up a bit.  The vacancy supposedly went to almost zero.

I think the key is knowing why the place is vacant and having a solution to that problem BEFORE you buy instead of trying to figure out the problems and how to fix them afterwards.  Listen to the experts, though... I'm just a newbie!

Les Michaelson · Answer

Now your pointing out how commercial real estate can be a gold mine ... or a money pit. Even so called experts have been burned by making poor decisions. A safer choice might be be multi tenant strip mall in a good location. At least 1 vacant stall won't sink you, and the location would easily fill the vacancy.

Ryan A. · Answer

AD1985

Am I right to believe that commercial property depends mostly on location? If a commercial property is vacant/partially vacant can we say it is most likely in a not-so-good spot or in such poor condition that no business would lease?

That is the first thing that comes to mind when I contemplate commercial realty.
I guess you could get lucky and find mismanaged property.

Thoughts anybody?

Account Closed · Answer

Obviously a property that is not producing much in net income will be worth a lot more when it is turned around.

You have to understand the local market to know if you can fix the situation of if the problem is more structural (location, physical structure, functional obsolesce, supply vs. demand imbalance that is not temporary).

A change of use can sometimes be the best way to make a large difference. Again you really need to know your local market.

Did you have any more specific plans or ideas that you wanted to discuss?