29 Oct 2015

Uncovering Hidden Opportunities in Today’s Real Estate Market

Opportunities in impaired real estate

Brent Anderson
Real estate is a complex, fluid market. Prices are always in flux, buyers and sellers are nearly always at odds, and opportunities that seem “can’t miss” to one person seem completely hopeless to another. However, this complexity creates an upside: inefficiencies in the traditional process provide an enormous opportunity for investors who are willing to do a little legwork when valuing and acquiring properties that are overlooked by the vast majority of real estate investors.

Most real estate investment is related to income producing properties. A much smaller amount is invested in “value add” real estate where returns are higher, as are the risks. Of particular interest is the market segment known as “impaired properties.” These properties often require significant investment in due diligence. Similarly, they require investment to take the property from the current “as is” condition to a much higher exit value. The term “impaired” refers to a wide range of issues that cause a given piece of real estate to be valued substantially below the market. Common impairments include, bankruptcy, environmental issues (brownfields), excessive leverage or properties that physically no longer meet the market demands.

Whatever the reason, impaired properties—which are often urban industrial sites that developers want to repurpose for other uses—need some help getting to investment grade condition. As a result, many real estate investors steer clear of this part of the market, unsure of how to best proceed when faced with these types of out-of-the-ordinary issues. And that’s why, for investors who know what they are doing, these properties also represent one of the most significant opportunities in real estate investment today.

Opportunity in Action

Consider these real world examples of successfully redeveloped impaired properties:

 

• Inner Harbor, Baltimore, MD: Redevelopment of the harbor began in the 1950s with the removal of old warehouses and piers and the creation of parks and open spaces, eventually expanding to include new residential and commercial developments. In 2009, the Urban Land Institute called Baltimore’s Inner Harbor “the model for post-industrial waterfront redevelopment around the world.”

• Stapleton Airport, Denver, CO: What was once Denver’s commercial airport has been redeveloped into a 4,500-acre mixed use development containing industrial, commercial, office and residential districts.

• American Tobacco Historic District, Durham, NC: This collection of 14 former tobacco warehouses in downtown Durham was redeveloped into office and retail space beginning in 2001, anchoring the city’s ongoing downtown revival.

 

In each of the instances, the properties were returned to productive reuse, with a significant increase in value. However, this required significant investment in time and resources from developers and communities to position these sites for redevelopment.

While this investment is warranted for these large sites, the significant transaction costs do not work well on the thousands of smaller impaired properties. Wading into the market for impaired real estate is like taking a complex subject and making it exponentially more complex. Not only are there new variables at play with these deals—such as remediation costs, reputational impairments, and the added complications of public-private arrangements—few in the industry fully understand the challenges and costs associated with impaired real estate, or have the tools at their disposal to value them properly. As a result, most real estate investors pass on these opportunities, properly recognizing that they lack the institutional experience and knowledge to address the unique problems and value creation opportunities associated with impaired assets.

By contrast, developers with experience and knowledge in the impaired asset space can provide returns that are three to four times that associated with income producing properties and can unlock literally millions of dollars in additional value. Similarly, with thorough underwriting, the attendant financial risk is not substantially greater. Successfully working in the value add, impaired asset market requires integrated skills. Success also requires accumulating substantial experience related to transaction and financial structure, entitlements, remediation, demolition and a number of fields of expertise. Just like “location” is the three most important factors in real estate, “experience” is the three most important factors in the impaired asset market.

As more and more urban properties are being repurposed for residential, retail and other uses, investors are increasingly faced with questions surrounding not only the value of their once-industrial properties but how much any potential impairment may impact the future value of the site. In fact, property investors, buyers, sellers, and owners often fail to get the most out of their impaired real estate.

Specific Expertise for a Niche Market

RESIGHT was created to bring clarity to this challenging, yet valuable part of the market. RESIGHT is a group of specialized real estate advisement and investment professionals with the expertise to address impaired real estate, bringing advanced new valuation tools and understanding to this particularly complex part of the market. RESIGHT’s principals have been in the impaired asset market and RESIGHT leverages and builds upon this enormous wealth of experience. We’re executing deals that, until now, languished because they were perceived to be either overpriced or hopeless by others. In the process, RESIGHT increases property values, maximizes asset efficiency, mitigates risk, and minimizes potential liability for property owners and investors alike.

Ultimately, RESIGHT aims to provide a unique perspective on the acquisition, sale and operation of impaired real estate assets, through deep analysis and a proven, repeatable methodology for assessing surplus, distressed and impaired real estate. This integrated approach, combined with RESIGHT’s extensive experience, results in more opportunity, less risk, and increased value.