Adaptation | Commercial Real Estate Finance

At risk of drawing the ire of the people behind SOPA, I?m going to make unlicensed use of the movie Adaptation to bring up the role of Darwinian principles in the commercial real estate market.

Thanks to more limited financing and the major drop in construction spending that came along with the bankruptcies and defaults of ?08 and beyond, our economy has become much leaner. The commercial real estate market, which up until the recession enjoyed low cap rates, a high amount of construction, and sprawling projects in markets throughout the country, has been forced to adapt to an economy unwilling to generate much new supply.

?Adaptive reuse,? the decades-old practice of using an old building to serve a new purpose, is gaining in popularity as a result of today?s market conditions. Before, properties were often repurposed to be in keeping with zoning ordinances, or to preserve a particularly attractive/historical/prized structure. Today?s adaptive reuse is perhaps more pragmatic.

CoStar explains:

Developers are closely monitoring dual legislation from the White House and in Congress that could result in the disposition of thousands of excess or underused federal buildings.

It seems the White House and the Republican-controlled Congress have taken a brief break from their usual discord to pursue legislation that would divest a great number of unused and underused federal buildings, in a move similar to the Defense Department?s Base Realignment and Closure (BRAC) process.

While Obama has proposed a commission called the Civilian Realignment Board, the House has introduced the Civilian Property Realignment Act.??Through these measures, the sale of excess properties could generate billions of dollars of revenue for the cash-strapped federal government.?H.R. 1734, which was passed in the House last month, would create a sort of ?Civilian BRAC? commission. As CoStar reports,

the commission could raise $15 billion from property sales, and generate much more in savings by eliminating future operating costs?

In a closely related sector, the U.S. Postal Service ?is also attempting to slim down as it combats the budgetary woes that seem to leave it perennially on the brink of bankruptcy. ?Like the federal government, the USPS owns numerous historic, spacious, or ideally located properties just waiting for a developer to take it off their hands. With many of their branches under-performing, the USPS has already begun to trim away its fat.

In one auspicious case, the U.S. General Services Administration has awarded the redevelopment rights for the 113-year-old Old Post Office Pavilion (above) to a group of investors from Donald Trump?s hotel group and private equity firm?Colony Capital. This Washington, D.C. landmark, located on Pennsylvania Avenue, will be repurposed as a 250-room luxury hotel.

While major new developments may not be feasible for the near future (even with occasional news of increased construction), the supply of well-positioned government/USPS properties that will soon flood the market could keep many developers and investors busy for some time.

#CRE #finance

Source: http://llenrock.com/blog/adaptation/

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