San Antonio Commercial Real Estate Development

 – Owner Occupied-

 What is Owner Occupied Commercial Real Estate Development?

In the world of commercial real estate development, there are countless product types. Each product type has its own variables to manage and almost every municipality has their own specific rules governing the development process. No two commercial properties are identical, so please understand that each property also has its own variables to manage. To improve the likelihood of success in your next commercial real estate development project, I highly recommend working with professional advisers experienced in the product type and area that your project is located in. Over the next few weeks, we will cover a new series discussing the commercial real estate development product types we are regularly involved in. Today’s article, covering Owner Occupied Commercial Real Estate Development, will be followed next by Merchant Development.

Owner Occupied Commercial Real Estate Development (health care, retail, general office, or industrial)

This may not be a segment that many commercial real estate developers include in their list of services. As commercial real estate brokers, assisting clients to develop (or re-develop) the commercial building that they intend to occupy is a natural fit for us when we are aiding them in their site acquisitions. Although I am a big supporter of owner occupied commercial real estate, unfortunately, my opinion is that this market segment is one that often lacks the detailed due diligence work that I see in more traditional types of commercial real estate development and investment. The old real estate saying, “you make money when you buy” could never be more true in this situation. The problem I see with many owner occupied commercial real estate projects is that the buyers of these assets don’t always understand “when you buy” also includes the changes you must make to the property to be able to occupy it (countless variables) and properly analyzing financial projections to show why the proposed modifications make sense BEFORE they purchase the property. Please understand that it doesn’t always make sense for business owners to own the commercial real estate their business occupies. Click Here to read an article discussing some of the decisions that a business owner should consider when deciding to purchase or lease space. The more homework business owners can do BEFORE they close on the purchase of the properties, the better chance they give their commercial real estate development projects to succeed.

Our group has recently listed two commercial bank foreclosures (two different banks) in San Antonio that originated from poorly planned owner-occupied development projects. Why would we see two of the these in one month? For starters, the volume of owner occupant commercial real estate projects has grown due to financing being more readily available than more traditional investment commercial real estate loans. When the lending market slowed a few years ago for commercial investment real estate, many lenders turned their attention to the owner occupant segment of borrowers. In theory, the reason is simple. If you were a lender, would you prefer to finance a medical group which has been leasing space in the same location for the last 10 years to purchase an office down the street with a similar mortgage payment to their current lease expense…or would you prefer to finance an investor group to build a speculative retail center or purchase an office building with short term leases in place? I know what you are thinking. Without knowing all of the details, this sounds like a fairly obvious decision based on risk (assuming the medical group was in a financial position to make the purchase). Why wouldn’t you choose to lend to them over the investor groups? This would be a simple answer if purchasing commercial real estate was like purchasing a car. A new car loan is a relatively simple decision for a lender because automobiles typically come with standardized makes and models. Other than the buyer upgrading to a leather interior or deciding if he/she wants a sunroof, the decision to lend falls mainly on the buyer’s ability to repay the loan since vehicle purchases don’t require the buyer to improve or make changes to the car in order to be able to use it. Commercial real estate development is different because of the countless variables associated acquisitions and preparing a site to occupy. For example, we had construction bids ranging from $1.6m to $2.6m on a recent owner occupied Medical Office Building project that we were involved in. Do you know that many owner occupant commercial real estate buyers purchase properties (land and/or buildings) without completing any analysis to determine what the cost to occupy the site might be? Do you know that some owner occupied commercial real estate buyers don’t have commercial real estate brokers, contractors, architects, civil engineers, and attorneys representing them to purchase properties and advise them regarding easements (access or utilities), zoning, building set backs, water retention, clear title, horizontal costs, or vertical costs before they purchase the site that they intend to occupy?

Office Condominium projects have gained interest in the marketplace from buyers because they don’t come with many of the risks associated with development. The developers of these projects often speculatively build fully developed office parks with plans of selling shell office condos at a fixed price per square foot. The developer typically leverages economies of scale to acquire a larger land tract at a wholesale price to build multiple office buildings (or larger multi-tenant building) at wholesale construction costs (less than he/she might spend for a single building). The developer sells the individual condominium units at a retail price to owner occupied commercial real estate buyers. For “non-development experienced buyers”, this type of an acquisition could make sense, assuming they intend to occupy the building for a long period of time. This solution also makes sense for small office space requirements due to the limited economies of scale in developing office buildings under 2500 SF. A doctor group needing a 1500 SF lease space for example, might benefit from this type of acquisition (assuming they don’t intend to expand in the near future or move). Office Condominium projects don’t typically come with the potential upside, “created equity”, or resell value that a properly orchestrated fee simple land development or building acquisition/re-development provide.

More and more owner occupant groups are hearing stories from friends and competitors about their commercial real estate deal that they just did. Due to this, we are seeing business owners lacking experience in commercial real estate investment or development “jumping out of the plane with no parachute”. Most business owners I know would seek the best surgeon in town if they were in need of surgery…or the best attorney in town if they were in a lawsuit. Why is it that many business owners try to acquire and develop (or redevelop) owner occupant commercial real estate projects with little to no advisement? This is a great question, expecially considering the fact that almost all of the small and large commercial real estate building owners that I know in San Antonio (who hold property for investment purposes-not to occupy) hire advisers to represent them. In trying to better understand the answer, we have to put ourselves into the shoes of the traditional owner occupied commercial real estate buyer. It takes a person of intelligence to run a profitable business for an extended period of time. These business owners may be the most knowledgeable person in the world in their particular professions, but if they haven’t participated in any commercial real estate activity other than cutting a rent check to a landlord during their duration in business should we expect them to know how to navigate a commercial real estate development? My opinion is that many of these groups don’t hire advisers because of a perception that they might save money. Unfortunately, situations like the two foreclosure listings that we took recently come from these types of “cost savings” thoughts. Owner Occupied Commercial Real Estate Development can be an amazing opportunity for the right business owner as long as he or she makes sure to do their homework.

Check out the following link to Commercial Real Estate Buyer’s Checklist . This series discusses “some” of the topics that commercial buyers should consider as well as the team members they should pull together to advise them properly on a their next development project.

Thank you for reading this article. Please feel free to leave comments in the section below.

Stay tuned for our next Commercial Real Estate Blog Article! –

NEXT WEEK’s Topic – Commercial Real Estate Development – Week 2 – Merchant Development

Contact a Commercial Real Estate Expert today:

Link LeGrand, CCIM 210-789-5465

What is Owner Occupied Commercial Real Estate Development?