Timing is almost everything in commercial real estate investing. We must time the market correctly in order to acquire investments that will appreciate in value. It appears that it may finally be time for investors to seize the multifamily conversion opportunity arising throughout the state of California. We’ll show you how Reonomy can help you to find overlooked, diamond in the rough properties that real estate investors and developers can transform into much needed multifamily properties.
The California Housing Crisis
The economy of the state of California is strong. However, the state faces an affordable housing crisis that is so severe in places that it may actually be causing job losses in Silicon Valley. According to The Sacramento Bee, the current housing crisis in California can be traced back to anti-building activists who began to oppose new residential building in the 1970’s.
Over a period of decades, these activists, also known as NIMBY or Not In My Backyard, have used lawsuits and other tactics to stall or stop new residential building. These lawsuits drastically inflate the developer’s costs so that he or she must now create a luxury residential product rather than something more affordable. According to The Sacramento Bee, to meet the current demand for market rate and low-income housing, California must roughly double its current inventory. The need is even greater in the Bay Area.
Local and state politicians have tried in vain for decades to alleviate the housing shortage in California with little success. However, now that the lack of affordable housing is causing the state economy to weaken and lose jobs, developers and investors might finally have the political leverage they need to create more multifamily housing in the state. Those that have traditionally opposed new residential development in California might be swayed to tolerate more dense housing, at least in those areas where most people work.
Creatively Solving the California Housing Crisis
As real estate investors, we must often think outside the box to earn our profit. Purchasing existing apartment complexes or land to develop apartments could be a very expensive choice. The Sacramento Bee reports that residential property in California sells for $150,000 per acre or more in coastal areas compared to $20,000 per acre in other large US cities.
Furthermore, if our goal is to create reasonably priced multifamily units located close to California employers, it makes more sense to convert existing structures that might need rehabilitation or simply be vacant.
Today we will show you how to use Reonomy to search for potentially vacant or run down hotels, motels, and shopping malls that could be converted to multifamily properties with investor capital and creativity.
Converting a hotel or motel into apartment homes is fairly straightforward and common practice. A few changes might be necessary. For example, many modern hotels have a laundry room on every floor. If you are converting an older hotel room into an apartment, you might need to install a stackable washer/dryer in every unit.
Much has been reported lately regarding the so called “retail apocalypse.” According to The Atlantic, the truth about the current state of brick and mortar retail is somewhat complex. Consumers are purchasing more items online and they are spending their retail dollars at restaurants more often. In addition, it appears that brick and mortar retail buildings have simply been overbuilt in recent years.
Whatever the cause, the slump in brick and mortar retail has led to landlords becoming more flexible in order to fill rental vacancies. Some of these vacancies are being filled by so called pop-up stores which have extremely flexible lease terms. Meanwhile, CNBC cites a JLL report that some malls are adding multifamily and hotels.
Transforming a retail shopping mall or big box retail into a multifamily building will not likely be as straightforward as a transition from a motel to multifamily. Still, it’s possible. Following the Louisiana World Exposition of 1984, numerous old factories and warehouses were successfully converted into desirable, upscale apartment buildings and condominiums. Today, this New Orleans neighborhood is known as the Warehouse District.
Whether you are considering converting a hotel, motel, vacant retail building, or shopping mall into apartments, the key is always the condition of the building. Prior to conversion, a structural engineer should be consulted to determine whether the existing structure is in good or excellent condition.
The condition of the building really depends upon how well it’s been cared for over the years. Some older buildings have been so neglected for so long, it makes more sense to tear them down rather than try to repair them.
Using Reonomy to Search For Hotels and Motels
Using Reonomy’s radius tool, we first draw a circle around the San Francisco Bay area. Next, we select hotels and motels under the Land Use Picker. Finally, because we are seeking older, potentially dilapidated properties that we could acquire relatively cheaply and then transform into affordable apartments, we select properties built prior to 1975. This yields a total of 1169 properties, most of which appear to be clustered in San Francisco, Concord, and Santa Rosa.
Searching For Retail Properties
Getting even more creative, we continue to use radius tool to focus on the San Francisco Bay Area, but now we change Reonomy’s settings to search for retail buildings. Specifically, we are looking for malls and neighborhood shopping centers built no later than 1975.
This search yields 11,449 results which will have to be narrowed down further. With this search, we are seeking older, possibly dilapidated shopping centers that may be struggling with vacancies as a result of the massive trend towards online shopping and upscale, experiential retail.
Note that if we change the search criteria to retail buildings constructed between the years 1975 and 2000, we get 4157 results, the majority of which cluster in and around San Jose. These structures would be newer and likely in better shape than those built prior to 1975.
Since some brick and mortar retail shopping centers have been really struggling lately, it’s possible that some of these centers in San Jose could be acquired and repurposed into affordable apartments for workers. Further investigation on the part of the investor would be required.
The shortage of market and affordable housing in the state of California may have reached crisis levels after festering for decades. California’s strong and enviable economy may actually be at risk because workers who are unable to find affordable housing and are unwilling to commute for hours every day may move out of state. Eventually, this could lead to a shortage of critical workers in California and could even cause wage inflation.
Reonomy is an invaluable tool for the creative investor. With just a few clicks, an investor can find hundreds of potential multifamily conversion properties that no other investor is likely considering. With the data gleaned from Reonomy in hand, investors and developers can conduct further research in the field to determine if these properties fit their investing criteria.
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