Real Estate Prices Often go DOWN (by 87%!!)
Last week a 1.4M sq. ft. office building at 175 W. Jackson Blvd, in downtown Chicago sold for approx $41M ($29/ft). This is down 87% from Brookfield Asset Management’s original purchase price of $306M in 2018 (source Bisnow)
What Causes Such a Dramatic Drop in Value?
Leases. In commercial real estate 90% of the value of a property is created by the lease. Jackson Blvd had a 56% occupancy rate in June of last year. Lenders will typically avoiding lending on unstable buildings like this, because the cost to backfill that 44% vacancy is tens of millions of dollars.
Why not just sign new leases?
Every new lease in most commercial real estate asset classes requires TI (tenant improvement $). Office requires new layout, reconfiguring fire sprinklers, new carpet, etc. Industrial often requires electrical & lighting upgrades as well as new roofing & sprinkler system repair. Retail requires cash payment to offset the cost for the tenant to build out their space. And of course, even apartments need to be painted & functional to lease. Not to mention leasing commissions for every asset class mentioned here.
For Sale at 50% Off!!
- Dark Rite Aid locations, sold 3 years ago $3.5M. Value is $1M or less with no lease.
- Dark Dollar General locations, sold 5 years ago $1M. Value is $200K, maybe.
- Dark Burger King, Chicago suburb. Sold 4 years ago $2.8M. Value is $500K, maybe.
In any of the 3 examples above, I’d reluctantly buy. I would feel like I’m overpaying because I know I’m going to bleed money for years until they gain a new tenant. These aren’t great deals, they’re barely acceptable deals.
The lesson here is understanding the risk of tenants moving out or going bankrupt. No more lease, no more retail value. Most owners of vacant property like this didn’t think the tenant would move or fail. They learned the hard way.
We Own, Operate, & Buy (Vacant OR Leased)
- Industrial & Commercial Property, 10K sq. ft. – 250K sq. ft.
- Mobile Home Communities (50 pad minimum)
- Well located Retail Development Sites
- Residential MFR & SFR
- Ideally long term rented asset with below market rents