How to identify commerical property with room to improve?

Question

I can easily search LoopNet and search for commercial properties with high listed cap rates. But what about finding properties that have room to improve?

What identifying characteristics should I be looking for?

Jeff Kehl · Answer

@Patrick Philip opportunistic and value-add commercial absolutely exists. My point was just you won't find it here in the forums. The only way to find it is with the brokers and syndicators in those individual markets. And it will vary greatly by market.

For instance Medical office is highly sought after in some areas. In my area I'm having trouble giving it away because there is too much supply.

I'll give you a good example from a webinar I listened to today. There is a hospitality company that has a lot of experience operating Marriott and Hilton properties. They developed a Marriott residence inn in downtown Memphis in 2004 and have operated it since then. They have sold and bought it twice since then and are offering it to investors again.

They have a great value-add strategy and it's in a great location in a town that I think will see a lot of growth going forward.

So while I won't sit here and tell you just go invest in hotels everywhere I think that particular one is a great opportunity mainly because of the sponsors and location.

If you're looking for people to tell you their favorite area to look, mine is retail strip centers. I think there are great deals out there because of the 'retail apocalypse' theme in the media that ignores the subtlety that physical sales are still necessary in a lot of cases.

But that does not help you much because you need to do a lot of work in that area to find good investments because many of them are terrible and will go dark/declare bankruptcy.

Jeff Kehl · Answer

@Patrick Philip I think the point they're trying to make is that what you're asking for doesn't easily exist and if it did no one would tell you about it in an online forum. The fact that you would ask makes me wonder about you.

What were you hoping to hear? If you search for industrial warehouses between 20-30k square feet in small towns near a major metro with 2%+ job growth and you can pay less than $120/square foot you will become rich?

No one can do that except maybe a very experienced local broker which is what they advised you to look for.

Theo Hicks · Answer

@Ronald Rohde exactly. Work with the local brokers who actively source the type of commercial deals you are looking for. You can even start by reaching out to the brokers who are listing the properties you've looked at on LoopNet.

Ronald Rohde · Answer

You should not be buying commercial properties if you're looking for this information. Find a commercial broker or lawyer who has experience in your market.

Tyler Kastelberg · Answer

@Patrick Philip

Patrick: Commercial value is unlocked through leasing. This is similar to multifamily but more important to note as leases can span many years. Like multifamily, you can find commercial properties with under market rents and opportunity to make value-add improvements (improvements that will appeal to tenants). The science to commercial value add is leasing to higher quality tenants at higher rent rates. The art is how you go about doing it.

Ronald Rohde · Answer

Every investor also has different goals, equity return thresholds, unique experiences, etc. Those are your characteristics, not general things like "add a loading dock" =instant profit.

Patrick Philip · Answer

You're telling me that "value add" or "opportunistic" commercial real estate doesn't exist?

Steve McGovern · Answer

Ok, I'll bite:  Neighborhood retail.  LOTS of "room for improvement."

....  Note:  I never said it would get (back) there.

Patrick Philip · Answer

So you don't know what characteristics I should be looking for?

How to identify commerical property with room to improve?

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