Picture this for a moment. It is January 1, 2009. The worldwide financial crisis is upon us. Companies are not moving or taking risks. And we own a vacant 10,000 square foot building in desperate need of tenants and rehab.
Hi, all! Liz back this week to share the story of our first commercial property — the challenges we faced and the lessons we learned along the way. One of the major reasons we bought our first commercial property back in 2007 was because after running the numbers, we were super excited about the cash flow we were going to make when fully leased by one tenant. Don’t we all love the idea of lots of “cash flow?”
Well, at the time, we were still fairly new to real estate investing, and we made a HUGE mistake. We did not look at the downsides of this deal, only the upsides. So we proceeded to buy the largest piece of real estate we own to this day: a 10,000 square foot commercial building in downtown Trenton, New Jersey. Owning and managing this property has been a roller coaster ride, so I thought I would share the case study and the learnings that we have gleaned along the way.
As I shared, the building is 10,000 square feet. It is only one story, so the building looks a lot smaller from the outside than it really is. There is one main entrance in the front of the building. Before we renovated the building, when you walked in, there was a lobby and some office spaces. There was lots of open space, in particular towards the back of the building, which consisted of 4,000 square feet.
Before we bought this commercial property, our portfolio consisted of about 20 residential units. We owned some multifamily buildings and single family homes. We certainly had more knowledge of the residential side of real estate investing compared to the commercial side. A friend and commercial broker brought this deal to us. The current owners were “owner occupied,” meaning that they owned the building and utilized all the space for their own organization. The organization was a nonprofit, and they wanted to move their space outside the city. When we did our financial analysis, we were excited about the cash flow based on the current market. Our plan was to have one tenant rent the entire space (10,000 square feet), and we would be in a good place financially!
The First Tenant
Shortly after closing, we learned of another nonprofit in the Trenton area that was in need of space. However, the catch was that they only needed a short term lease for one year due to the fact they were in the middle of constructing a brand new building for themselves.
In the commercial world, that is a very short time frame. For many commercial spaces, you won’t be able to get a lease less than 3 years. However, we did not have any other prospects for a tenant, so we agreed to their terms of one year. We figured this would give us time to find a long term tenant, and we would be achieving our “cash flow” goal in no time!
As the lease end date quickly approached, we did NOT have any other prospects to rent our space. The good news was that the current tenant wanted to extend their lease for a few more months, until December 2008. The bad news was that 2008 marked the beginning of the financial crisis, which I am sure you remember fondly.
Making Lemons Out of Lemonade
As 2009 began, we had an empty 10,000 square foot building and no foreseeable prospective tenants. The financial crisis was impacting the global and local economies. Commercial leasing was negatively impacted, especially in an urban economy like Trenton.
So, my husband and I had a choice — like we all did as real estate investors. We could try to sell this building, but the likelihood of that happening was extremely slim. We needed to rent this building and fast. During various brainstorming sessions and conversations with many people in our network, we decided to convert the building to a “small business center” where we offered conference room and office space to small business owners and entrepreneurs. We committed to a new plan for the building and got to work quickly!
We received a loan from our bank and invested money in renovating the inside and outside of the building. We even renovated it with some “green” features; that way we stood out. For example, the carpet we used was made from recycled soda bottles, and the paint had a low VOC. There was only one building in Trenton that was offering office space to small business owners, and we were good friends with the owner. Therefore, we knew we could be a resource to one another as we both worked hard to lease our spaces. At the same time, we knew we needed to make our space stand out and offer some unique features.
We offered (and still do) the following that helped our marketability:
- Virtual office space
- Conference room rental
- Access to small business counseling (SCORE)
- Affordable and flexible lease terms
- Entrepreneurial and small business environment
Where We Are Today
Well, I have to say, we have come a long way since 2007. Once we renovated the building, it took a lot of hard work and diligence, but we slowly yet successfully leased the building. Eight years later, we have 18 small business tenants that utilize space anywhere from 100 to 3,000 square feet in the building. We have two different sized conference room spaces and a seminar space that can sit up to 50 people.
We are cash flow positive and currently have only one vacant office. I have to say, the coolest thing about this building is the community that has been built. We have attorneys, real estate investors, financial advisors, career counselors, nonprofit organizations, and many other tenants that network with each other, help each other, and give business to one another. It is really amazing to see this in motion. You can’t put a price tag on this, but it certainly adds to the marketability of the building.
Learnings & Conclusion
As with any real estate deal, you have the choice to learn and grow, or you have the choice to throw in the towel. We chose to learn, grow, and make lemons out of lemonade.
Lesson #1: It is not what you want, but what your market demands.
When we purchased this 10,000 square foot commercial property, we had a vision of one tenant occupying the building. However, the economy and local market did not align with that vision. At the end of the day, it does not matter what we wanted; it mattered what was happening in the marketplace. Remember — markets are in charge, not you!
Lesson #2: Offer something that no one else is offering.
We created a space for small businesses that no one else in our market was offering. Not only did we offer affordable small business space, but we created a community for these small business owners to network with each other.
Additionally, we offered free business coaching, educational seminars, flexible lease terms, virtual and conference room space. Regardless of the real estate investing niche you are focused on, remember to offer something unique so you can stand out from the crowd.
Lesson #3: Invest in an area, not just a property.
Not only do we have a cash flowing property, but improving our building has improved the area in which the building is located. We decided to invest in more deals on the same block — a block (like many in Trenton) that is in need of revitalization.
For example, here is our current activity on the same block: (1) we are in the middle of construction of a gut rehab on the same block that is converting a vacant dilapidated building into 4 apartments and a storefront; (2) we are in negotiations to buy another large (and anchor) commercial and residential building on the block; and (3) we just made an offer on a foreclosure that has no windows! Bottom line: We can make a real difference in this community by not only investing in one property, but multiple properties on the same block.
I hope this story of our first commercial property and the lessons we learned as a result have been helpful to you.
Every deal can teach you something if you allow it do so.
What lessons has real estate taught you recently?
Leave a comment and let me know!