During the recession, and over the past few years throughout the recovery, many investment property owners have been in a holding pattern for several reasons. Retaining existing tenants that pay rent on time was a priority, especially during the market decline when cash flow may have made the difference in order to refinance an existing mortgage and/or not be forced to sell the property to generate liquidity. Caution was in the air for several years as owners worked through the challenges brought by vacancy, rent reductions, difficulty in obtaining financing and fewer opportunities for “willing sellers” to sell at market value when having to compete with foreclosure sales.
Many market sectors have stabilized or began improving to a level where it may now be worthwhile to evaluate the property’s market position and potential for increasing its value. Real estate that is developed with existing building improvements that maximize the site may have potential for repositioning through remodeling and/or renovation to attract a new tenant, improve operations of the existing occupant or prepare the property for sale. Underutilized properties having excess space within an existing building, or excess land capable of allowing for expansion and even development of additional buildings that can utilize current site improvements, can create opportunities for improved cash flow and/or a higher value.
Any highest and best use exercise begins with an understanding of underlying land value. Quickly contrasting the value of the property under its existing use with the underlying land value can reveal if the existing improvements contribute value. Sometimes this is a relatively straight forward conclusion to reach when the existing building is newer, the site is efficiently developed and market conditions are stable; however, in areas that have experienced significant new development or redevelopment, existing properties should be carefully evaluated beginning with the estimated land value. Those determined to have at or near 100% of overall value consisting of land value may be ripe for redevelopment as warranted by market conditions of a proposed use. If the existing use is underutilizing the site, and additional development can be accommodated while retaining the existing building (or building shell), this should be thoroughly evaluated so any contributory value of existing buildings/site improvements is retained.
It is not uncommon for us at Hosch Appraisal & Consulting, Inc. to encounter properties that are currently underutilized with growth potential. Our highest and best use analyses and consulting assignments have assisted clients in evaluating their options in order to maximize the value of their investment real estate. The cautiously optimistic outlook among business owners and investors, coupled with a competitive bidding environment from contractors working to win back market share, could create opportunities for creative buyers, sellers or existing owners trying to increase equity by repositioning or redeveloping their investment real estate.