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New Year, New Use

The alternative data sources investors are using to identify new uses for properties

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While the pandemic might be coming to an end, we will likely be feeling its effects for years to come. For the property industry that means re-examining the value proposition of many struggling properties. Owners with empty office buildings and vacant malls are now considering the possibility of switching their properties over to more desirable property types, namely residential and industrial. 

But changing the use of a commercial property is risky and costly. Before any adaptive reuse decision is made there needs to be a lot of homework done about the market (both for the original use and the proposed one) and the cost of the redevelopment. To analyze these complicated, dynamic factors property companies are utilizing both their old, trusty real estate datasets and new macroeconomic ones as well.

The market is the first important variable in the reuse equation. Most property companies are used to looking at comparables but when it comes to predicting markets that could be years out, local economic data needs to be used as a leading indicator of future property values and rental rates. “A lot of our clients use payroll data from ADP and spending data from any one of the various agencies,” said L.D. Salmanson, co-founder of the property data platform Cherre. “If you look at the demographics of the people moving in and moving out, you can use that to inform your calculation for future housing demand. If you look at the industries of the companies that are moving in and moving out, you can use that to inform you calculation for future logistic space demand.”

Ancillary markets can also tell investors a lot about both supply and demand. Single-family homes have for years been one of the most sought after property types (by investors, homeowners, and renters alike) and so the change in price and transaction volume of single-family homes should be considered as part of any multifamily pricing calculation. Short-term rentals have become even more popular during the pandemic as well. “Data providers like AirDNA and AllTheRooms can help provide an idea of the seasonality of a rental market as well as help calculate housing supply since properties on vacation sites are not going to compete against the traditional rental housing stock,” L.D. said.  

Once an appropriate and profitable reuse for a building is determined, there is still the important factor of construction costs. Often, a use change isn’t feasible due to the amount of plumbing that is needed to make an office building suitable for housing, for example. While each site needs to be carefully analyzed by construction, design and engineering professionals there are some data sources that can help. The Turner Building Cost index is used to estimate development and replacement costs per square foot in every major U.S. market. These are particularly important now. Global supply chains have struggled with lockdowns and demand imbalances and so material costs are growing at an alarming rate. Likewise, labor costs have gone up due to extended unemployment benefits, minimum wage increases, and inflationary fears.

As much as data can be the compass through uncharted waters, there are certainly elements of redevelopment that can’t be easily boiled down into a spreadsheet. A prime example of this is entitlement. The time it takes to get the zoning changes and permitting needed to change the use of a building, or even part of a building, can be the difference between a profitable project and a disastrous one. “You can get data on permitting times from providers like BuildZoom, but they only tell you so much,” Salmanson said. “These types of use changes often require neighborhood approval which can be a big unknown.” Many developers hire consultants and lobbyists to help them through the entitlement process, and landlords looking to rezone their properties will likely need to do the same.

The pandemic has left many property owners with a tough decision. Either they hold on to an underperforming property and wait for the market to return, try to sell it in a deteriorating market, or redevelop it into something more profitable. All of these have their risks but only redevelopment offers a high reward. There are plenty of unknowns when redeveloping properties and that goes extra for one that is changing property type as well. But some of the many questions around adaptive reuse can be answered by the strategic use of alternative data sources.

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