Eyesore or Opportunity?

Investors and their service providers are finding new and creative ways to solve many problems related to troubled assets, but the latest challenge, which exists in most markets, is what to do about empty buildings. Empty office, industrial or retail assets can be an eyesore and an embarrassment for both the investor and the city. With vacancy rates that continue to rise in some submarkets, a distressed asset can very quickly become an empty asset and panic may set in. There may be ways to look at those assets as opportunities instead of problems.

The first stage in determining what to do about an empty building is to complete a property and market assessment. Just because a building is vacant does not mean that it has no value. Maybe the problem is more connected with the economy, with the vacancy coming from one significant industry or tenant. The problem may be related more to the property type having reduced demand or an environmental issue. It is also important to evaluate potential assistance from the municipality, since there may be tax rebates or relief for specific property types or business districts.

Valuations can provide a strong case for selling the empty building, but they will also help account for the future options for the asset. If it is a class A building in a prime location but has lost tenants due to the economy, then consult with a number of submarket brokerage experts to determine the level of activity in the market and the potential for large-block users who may be wooed into the building quickly. Since that isn't the option for most buildings, the next stage in the process is to consider repositioning the asset, mothballing it, demolishing it or redeveloping it. All of those options require a review of the loan structure to determine the feasibility with the lender.

The next step in the process is to minimize expenses. Quickly eliminate anything that doesn't support life-safety issues and municipal codes. We always consult with an insurance agent to understand the increase in insurance costs when changes are made to the operation. Sometimes, carriers will require an increase in security staff or systems to protect against theft, damage and misuse of the property. Most cities require that commercial spaces continue to keep the grounds at the same standards as if the building were occupied. Other expenses worth reviewing include: cleaning, waste hauling, energy and real estate taxes. If the complex has more than one building, consider consolidation of the tenants to reduce the expenses at the unoccupied assets. The full building will be more attractive to tenants and easier to clean and keep secure. It may actually help reduce utilities for the overall complex.

Without tenants, you may be tempted to eliminate all property upkeep. However, if marketing the building for lease or sale is in your future, that choice will likely eliminate any options you have for redevelopment or re-tenanting. You'll need to keep a regular cleaning schedule, keeping it marketable and ready to show. It is also critical for the investment team to keep in touch with the property managers, who should provide input on each of the options based upon feedback from previous tenants and prospects.

Repositioning an asset is often a viable alternative. It can be as simple as changing light fixtures, replacing carpet and painting. However, if the strategy becomes full repositioning, make sure the local leasing experts provide their advice on the best physical changes to make, based upon the current demand in the submarket. If repositioning the entire building doesn't make financial sense, consider renting a portion of the space for storage or temporary use.

Finally, if none of those options meets the financial and operational strategies of the investor, it will likely be time to consider demolition. With functionally obsolete buildings, this may be the easiest solution. Most assets require serious evaluation to determine that no viable income stream can be created from the existing building. At this point you are selling the asset for land value. This requires a complete understanding of those values, since developers now become your target market for an exit strategy. Regardless of your direction and ultimate strategy, vacant buildings propose significant challenges. Thorough knowledge of values, costs and viable alternatives are necessary. In many cases, more work is necessary than with occupied assets.

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