
What to Know and How to Begin Investing in Commercial Real Estate
Here are the steps you need to know when investing in commercial real estate and some tips to get you started.
Feldman Equities owns and operates large-scale high-rise office buildings located on the West coast of Florida. For Feldman, a renovation which results in a B+ isn’t good enough. Our goal is to bring every building we on up to a “Class A” condition.
Our theory of renovations is based upon what we believe is an overall winning strategy with respect to business in general. Our overriding policy on everything we do is to give the customer more than the customer expects. When a customer is surprised by getting more than they expect, the impact is that they feel obligated to tell friends about what a deal they got and this is what results in our expansion.
Our renovation strategy follows this philosophy. Before we close on the purchase of a building that might be in a “B” condition, we analyze what the cost will be to bring the building to a “Class A” condition. We will not purchase the building if we don’t believe those economics are feasible.’’
Many office landlords that acquire a building, prefer to keep spending low and don’t necessarily have the commitment to bring the building all the way up in quality. Our view is that when we go the extra mile to “surprise on the upside”, the brokerage and tenant community respond with bringing us new prospects and lease renewals and expansions.
An added bonus to bringing up our quality of buildings is that we can make them more liquid if we elect to sell the property. Many institutional buyers will not buy a Class B building. When we bring the building up to Class A condition, we make it more desirable to be purchased by an insurance company or similar institution.
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Let’s break down exactly what steps go into a commercial building renovation, including Feldman Equities’ ten-point checklist.
A commercial renovation consists of two parts:
Incidentally, we refer to tenant improvements as “TI” and we refer to capital expenditures as “CapEx”.
One of the challenges that we deal with when we renovate our building is the potential disruption to the daily operation of the building. Existing tenants have to be sold on the value of the renovation plan. Even then, after months of exposed insulation and adhesive odors, expect to be pointedly asked: “How much longer will this take?!”. To help assuage this situation, we communicate often with our existing tenants showing them the beautiful renderings of the way the building will look post-renovation and we give them a heads up in advance about potential disruption.
Fair question. Like so many big questions, the answer is “It depends.”
Depending on the detail, the scope, and the traits we select, a commercial building renovation can take anywhere from 6 months to complete, all the way up to a year or more. The lead time required to procure materials can have a big impact. When you expect to receive your building materials matters almost as much as how much they will cost and how you intend to install them.
One of the ways that we deal with this is to order the “long lead” items very early in the process. You don’t want to start construction, tear up a lobby or staircase, and discover that you have to press pause and wait for components to arrive because you got the timing wrong.
This is especially true of A+ renovations that use premium materials. The rarity of the materials doesn’t just drive up the cost and increase the appeal of the property—these materials take a long time to find because they are rare!
In one of our projects, we selected a beautiful ten-foot-by-five-foot Carrera Italian tile—very large slabs, coordinated with each other with matching veins. At one point, we spent at least three months just waiting for the tile. It had to be imported from Italy. The whole project was dependent on this long lead item.
You don’t want to start construction in certain areas until you know that these materials will be on-site. This is to minimize the impact on the building and the existing tenants. The final product is beautiful and glamorous. The process is not.
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A commercial building will not fill up, nor will it command high lease rates, if it is out of date. This is especially true of downtown high-rises, but it applies everywhere. You have to know your target tenant, and then you want to surprise them above their level of highest expectation.
More and more, we find that our tenants are smart, sophisticated tech industry professionals. Tech companies are one of the fastest growing consumers of office space. The staff that they hire are earning very high wages and may have worked for companies like Google, or Microsoft. They’re Millennials, and they don’t want to work in Dad’s boring office. They want to have cool spaces. Many of them decide where to work based on how “cool” the office looks.
We renovate every commercial building we buy, so we can:
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Castille at Carillon / Tampa, FL
The following ten phases inform every commercial building renovation project we take on. Here’s our checklist, followed by a detailed discussion of each item as they relate to our experience:
Our tenants are looking to commingle, share experiences, and work with each other in a fun, dynamic, and productive workspace. Therefore, we want to incorporate collaborative spaces in our building where people can congregate and socialize. We also provide spaces where tenants can retreat from the hubbub of the workplace in private discrete areas.
One of the most important aspects of all of our renovations involve thinking about what a prospective tenant or visitor to the building sees from the moment they park their car to the moment that they arrive into the lobby of the building. We think about every surface (vertical or horizontal) that they will see as they transit the lobby and get into an elevator.
We continue to focus on what the arrival sequence will look like when the perspective tenant or visitor arrives at the elevator landing on the particular floor they are visiting and the corridors that they walk-through to arrive at a particular tenant space. We refer to all of this visual experience as “psychography”, which literally means what the mind reads.
Another major part of the planning process is to assemble your team, which would include our lead architect and leasing and marketing personnel which will have input in the final design.
We will also want to carefully survey our tenants to find out what is needed and wanted before beginning the planning process.
We zero in on the pricing for the project. This inevitably means scaling down some items from the “in-our-dreams” conceptual design phase.
During the schematic design phase, the budget comes into play. We zero in on the pricing for the project. This inevitably means scaling down some items from the “in-our-dreams” conceptual design phase.
Once these ideas are refined, we establish a budget and coordinate with company finance to determine the feasibility of the proposed renovation. The best ideas from the initial brainstorming sessions are brought into budget as close to their original concepts as possible.
City Center / St. Petersburg, FL
Vintage buildings from the ’70s, ’80s, or earlier must be brought up to code. Depending on the level of renovation, the Americans with Disabilities Act (ADA) may apply. The renovation may trigger other new codes that we have to comply with.
Sometimes, the cost of MEP upgrades can be equal to or more expensive than the cosmetic upgrades. Things that tenants don’t see can cost more than the fancy chandelier that they do see in the lobby. We have done extensive modernization to the elevator systems in almost all the buildings that we have renovated.
Sometimes we agree to a guaranteed maximum price (GMP), or a “cost-plus” arrangement (cost of materials and labor plus a percentage markup for the contractor). We typically use an American Institute of Architects (AIA) standard contract, which is quite robust and protects both the contractor and us. AIA contracts also work particularly well for tenant improvements.
We bid the project and select the right contractors for the project. During this bidding process, “value engineering” “(VE) changes are sometimes made to the drawings to find more cost-effective options that do not diminish the creative designs, which were initiated at the schematic level.
We also use the schedule as a tool to inform our current tenants of the renovation project, and as a marketing tool to build excitement for prospective tenants. Sometimes, by the time the lease starts, they’ll have a brand-new lobby, a brand-new fitness center, a brand-new cafe, etc.
Our general contractor will make all the necessary purchases. All the labor, materials, and equipment should be lined up and ready to go. We make sure to ask to see the purchase orders as these should reflect products that correspond to your set specifications and all initially agreed-upon prices. We work hard to avoid oversights, because product and material details can quickly add up in commercial projects.
The planning and pre-construction phase is finally over. It’s time to get out the sledgehammers and nail guns. The construction phase may encompass improvements to:
The key to success of every construction job is the art of prediction. Predicting such things as when materials will arrive to the site or when men are available for the next task, is the “choreography of construction”.
Tenants typically have a lot of leeway for the improvements they make to a commercial leasehold property. However, we generally prefer that tenant improvements (TI), should complement our own renovation plan. We don’t want a tenant build-out to like Versailles while we’re aping Apple Cupertino in the lobby.
With respect to the vacant spaces, we make them much more marketable by either pre-building the space with a very modern wall layout. If we elect not to demolish the existing walls, we will bring all of the finishes of the space up to a very modern look. This will likely include all new modern LED lighting, new carpeting, all-glass walls, some open ceilings that give extra height to the space, new modern glass entry doors, etc.
Conclusion
City Center / St. Petersburg, FL
Commercial building renovation is a massive undertaking. For the uninitiated, it can seem overwhelming. However, with the right system, realistic expectations, and the necessary budget, it is doable. Here at Feldman we have a world class team that has decades of experience and a track record of success.
Our commercial real estate investments succeed when we exceed the expectations of exacting tenants, fostering long and fruitful relationships with the professionals who attach their businesses to ours. High renovation standards help us reach that goal, allowing us to add value for our tenants, achieve consistent occupancy at premium rental rates, and if we so elect, make the building much more attractive for the next buyer.
Santiago Bartolome – Executed Vice President of Development and Construction wrote this article.
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