Commercial real estate assignments ebb and flow between buyer opportunities and seller representations. Sometimes, we are asked to market a special purpose building or find our clients ourselves to consider one for purchase.
These unicorns may represent great risk and should be carefully evaluated. But before I caution buyers against these animals, let me clarify a little.
A general-purpose industrial building has wide appeal to a universe of buyers. Most structures fall into this category.
Power, warehouse clearance, loading doors and single-story office space will be on a typical buyer’s wish list. If an address favors a narrow piece of occupants, we call these special-purpose buildings.
We saw one of these in the mid-eighties as our industrial market adapted to the growth of microelectronics manufacturing. The clients needed a hybrid between a high rise office and a down and dirty space where stuff was made. Enter the R&D or R&D location.
Sporting more parking and a higher percentage of office space where engineers could work to bolt on areas used for construction. This product type was made dramatically more. Unfortunately, as supply increased, demand was falling as more production of this style was shipped overseas.
Thus we found ourselves with limited flexibility with a whole range of Industrial Construction – Special Purpose. It remains fallow for many years. Those who secured the residents prayed for their longevity, lest they be stuck with a costly void.
Another we see a facility with food-grade infrastructure improve as they are rarely converted into anything else. Sure, the next guy might be able to use up some cold or frozen space, but typically, floors end up in drains, washable walls, and piles of scrap.
With special purpose improvements, parcel buying becomes challenging for a myriad of reasons.
Chances are the occupant uses the intricacies and as long as he is in the residence, the owner is golden. If he bolts, they are scrambling to change his tenancy. You see, a huge investment in the goodies was gone and now the owner has to pay to remove them.
This of course assumes that that which is marketable. Often, it’s cheaper to scrap the whole thing and start anew. We saw it at countless aerospace campuses occupied by the likes of Boeing, McDonnell Douglas and Beckman Coulter. Made specifically for the use they put in, no one foresaw a time when a retool would be necessary. Why would they?
Rarely are sellers willing to listen to the downside and how it affects the price a buyer may be willing to pay. In the case of the above complexes, the owners had to realize that the buildings had no value and would all be based on the land below. A bitter pill indeed!
Now for the good news.
If you’re lucky enough to find one of these with a huge credit tenant and a long-term lease, there’s a big upside to be found. The bad news is a vacancy. However, because the location is so unique, there is no place to go. We refer to this as “sticky” tenancy. The improvisation causes the occupant to “stick” in place and not move.
Alan C. Buchanan is principal of Lee & Associates Commercial Real Estate Services in SIOR, Orange. He can be contacted at firstname.lastname@example.org or 714.564.7104.