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Crowdsourcing a Property’s “Highest and Best Use”

Landlords turn to short term rentals, events and pop-up retail to reduce vacancy

Choice Communications - Interior Design Services
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Los Angeles has no shortage of 50’s diners. It was built in the era where these roadside shrines to Americana were all the rage. But there is one 50’s diner in downtown Los Angeles that none of you have ever eaten in. Not because it is some obscure hole-in-the-wall, even though it most certainly is, but because this diner doesn’t even have a functioning kitchen. This Spacious Downtown Sun Drenched 50s Retro Neon Diner Restaurant Cafe Studio with New York Style City View isn’t a restaurant at all, but a space for rent on the venue rental platform Peerspace.

Who would have thought that this centrally located ground floor real estate was best used for advertising photoshoots, capturing Instagram pictures, or a nostalgic corporate event? Not any building landlord or real estate agent, that is for sure. The real estate industry is tasked with finding the “highest and best use” of a space. But predicting the best way to use a space in a rapidly changing modern economy is a tough task even in normal times. Now with the coronavirus upon us it leaves even more questions about what kind of space will be needed when we do get back to work.

Leasing agents and building teams don’t want to find the best use of space, the one that might be most profitable in the long run. They just want to find the most profitable use that will get it rented the fastest. Developers obviously want to make the most off of their investment, but they may not realize the added value from temporarily providing a flexible space for rent in exchange for the publicity that comes along with it. Their incentives aren’t aligned.

Adapting spaces to make them more useful becomes even more important during crises like the COVID-19 virus. Spaces that were some of the most valuable before the virus are now sitting empty. So how can we find new and innovative ways to use space. Ones that might not be obvious to those with a traditional real estate background? Maybe the answer is that we crowdsource. Landlords are starting to look more at platforms for events, short term rentals, and pop-up retail to help them reduce their vacancy, the silent profit killer that keeps the property industry up at night. These marketplaces have been able to unlock value for tenants willing to find the most creative use for a space, so why shouldn’t landlords set aside some space for them as well? 

Well, for a long time these fringe uses for spaces were just a rounding error on a building’s rent roll. But this is changing. “We have agreements with many of the top REITS,” says Eric Shoup of Peerspace, “Top properties are making around $200 thousand a year renting our event space.” He stresses that while some spaces are more desirable than others, he is often surprised at how even the most unique spaces get used. “We have no idea who is going to find a space interesting,” Shoup said. By creating a marketplace where everyone can find and inquire about flexible space, they have effectively opened up their clients to a much larger market.

While office meeting spaces are not in high demand during the stay at home orders, warehouses are seeing more action than ever. This is putting a strain on industrial real estate, an industry that has not adopted a flexibility mindset like its white-collar, office industry cousin, opting instead for long-term leases on large floorplates. Usually, these terms are only practical for large manufacturing or logistics operations. But flex use marketplaces are starting to emerge in this space as well. Brad Wright is the founder and CEO of Chunker, a short term leasing marketplace for industrial and warehouse space. “We have had companies come to us that need emergency storage,” he said. “Many companies are suddenly faced with too much empty space that they still have to pay rent on, because the goods they were expecting did not arrive or were sold out quickly and it takes a while to replenish them. On the other side, many companies are faced with having too much in their warehouses because the goods that they were expecting to ship out didn’t get shipped as expected while new goods are arriving daily.

Normally these companies would be faced with leasing large industrial space for these goods, which can take weeks or months to negotiate and put them into onerous, long-standing contracts. But the flexibility they desire might come from buildings normally outside of the normal industrial purview. “Many of them are interested in vacant retail stores,” Wright said. “Even though these properties are not on most industrial brokers’ radars, for certain needs, they work great. They have loading bays, open floor plans, and plenty of space.”

We are able to craft a narrative for a space and bring this to life through experiences, communicating the development’s vision to the world.

Stephanie Blake, Owner and CEO of Skylight

After this virus comes and goes there is a general consensus that much of our space will need to be rethought or redeveloped. I talked to Stephanie Blake, the owner and CEO of Skylight, a creative studio dedicated to placemaking for real estate developments. She explained that while in many cases, the highest and best interim use of vacant space might be events, This is especially true after a building has just been built or is undergoing redevelopment. “We are able to craft a narrative for a space and bring this to life through experiences, communicating the development’s vision to the world,” she said. “Landlords and developers can get the sort of publicity that we see awarded to architects and exciting tenants, and their projects can build an identity in a neighborhood in incredibly positive ways.” 

Her company focuses on adaptive reuse to help bridge a community’s past with the buildings of its future. One of the difficulties with any project in the last ten years has been the possibility of getting labeled as a gentrifier. This proper sounding moniker has taken on a sinister connotation, one that often is not looking out for the best interest of residents. But by giving back to neighbors in the form of events or art installations, Skylight has been able to connect the two often opposed groups of those who want redevelopment and those that want to keep the soul of their neighborhoods intact.

Short term space rental has always been seen by the industry as a last resort, a painstaking and risky effort that is called upon when vacancies are past the acceptable level. Maybe, though there should be some flexibility planned into buildings. This is especially true now during the COVID-19 crisis where we have seen everything from hotels, to conference centers to cruise ships have to double as hospitals during the height of the epidemic. Having a space that can be used for events or pop-up stores can keep a building fresh and tell it a lot about the psychology of the surrounding neighborhood. Maybe the real estate industry shouldn’t be forced to make the decision about what the highest and best use of a space is. Instead, by crowdsourcing the task, we might find ourselves with much more innovative uses of space and many more fake 50’s diners to rent.

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