Timing is almost everything in commercial real estate investing.
Buyers must time the market just right in order to acquire investments that will appreciate in value.
For California, the time for multifamily development is nigh, by way of conversion properties.
The California Housing Crisis
As a whole, the California economy has been strong for quite some time now.
However, the state still faces an affordable housing crisis that is so severe, it may actually be the cause of decelerating job growth 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.
These activists, abiding by the “not in my backyard” (otherwise known as NIMBY) phenomenon, have used lawsuits and other tactics to stall and/or stop new residential development in certain areas of the state.
These lawsuits drastically inflate the developer’s cost, requiring them to instead build a luxury residential product rather than something more affordable, just so they can cover their own costs.
Past articles have even stated that California must roughly double its inventory to meet current market demand. That 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, but with little success.
Now, with looming threats to the state’s economy, however, those that have traditionally opposed new residential development in California might be swayed to tolerate a greater density of housing.
How to creatively solve the California housing crisis?
In any market condition, real estate investors must always think outside the box to earn a profit.
In California, purchasing existing apartment complexes or land to develop new apartments could be a very expensive choice just by sheer sales prices alone.
*According to Zillow, the median home price in California ($550,000) is more than twice the national average ($230,000).
So, then, what can buyers and brokers do to continue drumming up deals with lower purchase prices and moderate development costs?
What might make more sense is property conversion—multifamily development that entails turning other commercial property types into multifamily assets.
If the goal is to create reasonably priced multifamily units located close to California employers, it makes more sense to convert existing structures that may already be vacant, or need rehabilitation.
Below, we’ll show you how to use the Reonomy platform to find and analyze vacant and/or rundown hotels, motels, and multi-unit retail shops that can be developed into affordable multifamily properties (with some investor capital and creativity).
Spotting Multifamily Development Opps with Reonomy
Most often, you’ll see hotels, motels, and retail buildings converted into multifamily properties.
In any case, the key is always going to be the layout and condition of the building.
Certain properties, like a shopping mall, for example, might not have a layout that’s conducive to becoming a multifamily property, even if the asset is in tremendous shape, and comes at a discounted rate.
Prior to conversion, a structural engineer should be consulted to determine whether the existing structure is in poor, good, or excellent condition.
Or, you can use Reonomy to very quickly scope out properties and get a strong idea as to what the layout and condition of a building is.
Using Reonomy to Find Hotels & Motel Conversion Properties
Converting a hotel or motel into apartment homes is fairly straightforward, and actually has become common practice around the country.
A few changes might be necessary, however.
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.
That’s just a small example, and will never come at a monumental cost.
Let’s run through a real example of using Reonomy:
Using Reonomy’s radius tool or location-based filters, we can narrow in on the San Francisco Bay area.
Next, we select the hotel and motel asset type filter.
Then, let’s say we’re searching for older, potentially dilapidated properties that can be acquired at a cheaper cost.
For that, we add a filter for properties built prior to 1975.
In the MSA of San Francisco-Oakland-Hayward, that leaves us with almost 700 properties in total.
What next? Well, with some more analysis, you might determine that the property is one of interest, and simply reach out directly to the owner, all with Reonomy.
Using Reonomy to Find Retail Conversion Properties
Much has reported about the so-called “retail apocalypse.”
According to the Washington Post, the truth about the current state of brick and mortar retail is a bit more divided than that—and should perhaps be more aptly referred to as a “nuclear malltdown.”
Some retail owners are simply trying to fill a limited amount of vacancies, often filling them with pop-up stores, which have extremely flexible lease terms.
Likewise, CNBC cites a JLL report that shows some shopping malls adding multifamily and hotels to vacant spaces.
Transforming a retail shopping mall or big box retail into a multifamily building will not likely be as straightforward as a transition from a hotel or motel to multifamily.
Still, it’s very 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.
So, let’s get creative…
We search again within the San Francisco Bay Area. This time, we instead search for retail buildings.
Specifically, we’re looking for retail centers with between 5-10 units, built no later than 1975.
This search yields almost 300 results, which you can then narrow down even further if you prefer.
Note, that if we change the search criteria to retail buildings constructed between the years 1975 and the present, we get just over 300 results.
These structures would be newer and likely in better shape than those built prior to 1975—but that could very well be what you’re looking for.
If an owner is struggling to fill vacancies and doesn’t want to deal with the headaches that are required for them to simply break even every month, your call might be exactly what they’re looking to hear (whether you’re a broker looking to help them sell, or an investor calling to make an offer).
Fending Off Crisis with Technology
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 (or may simply face stagnation) because workers are unable to find affordable housing and are increasingly unwilling to commute for hours every day into the office.
Eventually, this could lead to a shortage of critical workers in California, with an outside chance of it even causing wage inflation.
That’s where Reonomy—your source of property intelligence—comes into play.
No matter what market you’re in, or the standing of that market’s economy, property intelligence allows you the ability to work at lightning quick speeds while remaining as creative as ever as a broker or investor.
With just a few clicks, you can find hundreds of potential multifamily conversion properties that no other investor is likely even considering (because they don’t know they’re there).