Over the past few years, most owners of real estate, both public and private, have enjoyed seeing property values rise as the market has improved. Conversely, many buyers are voicing concerns that everything on the market is expensive and “there is no value left to add.” Although it may seem like much of the low hanging fruit has been picked, a discerning buyer, with the proper execution strategy, can still find ways to generate strong returns from assets, or, as we like to say at Velocis: “unlock hidden value.” The following describe a few opportunities or situations where value-add strategies can still be implemented:
• Cautious Owners. Many landlords become overly concerned with keeping an asset at full occupancy. Frequently an asset that is listed for sale is presented to the market as a “core” investment by these owners and may appear fully priced. Buyers should try to look at an asset with a fresh set of eyes. Perhaps the rents are below market. Or, maybe there is an opportunity to trade out an expiring tenant for one with better credit, thereby improving your cap rate on exit. The asset could actually be a hidden gem.
• Spit and Polish. As buyers and managers of real estate, we are always on the lookout for underutilized assets. In particular, we like to look for “B” properties in “A” locations and then improve the asset’s image and usability for tenants. This may include taking advantage of an asset’s walkability features, improving common areas to create tenant gathering space, or even simple updates like improving lighting or carpet. For retail tenants, new signage and visibility features are meaningful. Small changes can mean big things to your tenant base—and that can translate into an ability to increase rents or improve occupancy.
• Market Momentum. Frequently, a big part of generating “alpha” can be recognizing a market that is moving up, and getting in early. Research is a big component of this, but so is experience. At Velocis, we constantly draw on our relationships in various markets to help us understand market momentum, specifically at the submarket level. Listen to your sources and be in the markets as much as you can.
The bottom line is that there are always ways to find value at any point in the cycle. You just have to be discerning and creative and turn over some rocks to see what is hidden underneath.
Paul Smith is a partner at Velocis, which is active in the acquisition, operation, management, and disposition of commercial real estate. Contact him at [email protected].
