GUEST VIEWPOINT: Repurposing CRE Assets in the Current Market: What’s Hot and What’s Not?

GUEST VIEWPOINT: Repurposing CRE Assets in the Current Market: What’s Hot and What’s Not?
Robert Withers, President and CEO of M1 Capital Corp.

COVID-19’s impact on the local and national CRE market has decreased the relevance of CRE assets. Many assets simply don’t “work” in today’s post-pandemic environment. That doesn’t mean however that there isn’t a “life after death” for these locations. Indeed, they can hold much purpose, if you’re an owner or developer who’s thinking outside the box.

Some of these asset classes showed strain prior to the pandemic’s impact. For retail malls anchored by large, big box retailers, the pandemic was just the final nail in the proverbial coffin. Stand alone, single tenant retail properties, whose tenants could be restaurants, luxury retailers or even small grocers and bank locations, are all prime examples of properties that are perfect candidates for repurposing in many CRE markets.

Here are some examples of these types of properties:

Local and regional malls—These types of properties were already feeling the pinch as their large anchor tenants reeled from slowing sales and store closures. Retailers like Macy’s, J.C. Penny, and Sears were hit hard by the growth of electronic commerce, losing many customers to the convenience of online shopping. This was only exacerbated by the on and off store closures and fear of public gatherings caused by the pandemic. Many of these properties have lost their tenants to these store closures and are ripe for repurposing.

Mixed-use projects, incorporating retail, hotel, residential and hospitality components, are already being planned for many of these types of properties, both regionally and nationally. Lenders are excited about the prospect of helping to finance these plans as long as the project is well-thought-out, the developers have a track record, and the demographics of the area support the project.

Medium and small retail “strip centers”—We have all seen them lining the roads. Usually, they consist of several retail stores (restaurants, hair or nail salons, general retail or small grocery stores), but recently what you may notice is the absence of the larger “non-big-box” anchor. It could have been a regional furniture retailer, larger national chain restaurant, etc. These properties are ripe for repurposing into a solution for whatever is needed on a local basis. It could be additional medical offices to support the local hospital, auto dealerships (the automobile industry has surged if you haven’t noticed), or just a revamping of the retail component of the center which is less reliant on the foot traffic previous retailers relied on from the larger anchor tenants. In the industry, they are called “destination tenants,” those that people will travel to because the services they provide are necessary in today’s environment and cannot be done online or because they provide a unique in-person experience.

Again, financing for these types of projects, from the reconstruction for repurposing to the permanent mortgages provided to finance them, are readily available provided a plan, a resume of success and the demographics to support it.

Small hotel/motel assets—This asset class is the one I am most personally excited about. With the floor plates already in place and room to repurpose, these privately owned 20-50-unit hotel/motel properties can be converted into multifamily rental housing to provide low-mid income housing solutions. Taking advantage of the already constructed floor plates and unit configurations of these properties can be an excellent opportunity for developers looking to focus their attention on this sector, providing a solution to a much-needed housing issue in the current market.

Financing interest for these projects has been notably positive, with lenders seeing the need in the market for low-medium income housing, dormitory style solutions (for those near universities and colleges), and military housing.

The opportunities are out there, ready for creative sponsors with the capital to invest and experience in building successfully. The debt markets want to lend—and will if the project makes sense!

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