How We Do Credit: Part II – Location: What Matters for Each Property Type?
Commercial Real Estate
At RealtyMogul, investor protection is the crux of our business. In fact, it is one of our core values. That being said, we have ensured that our credit policies and procedures are comprehensive, appointed a Chief Credit Officer with over three decades of thought leadership in the industry, and assembled an investment committee with over 200 years of collective experience underwriting, managing, and acquiring commercial real estate.
To recap, in How We Do Credit: Part I, we reviewed the art of identifying capable sponsors and the factors our credit team considers when evaluating their qualifications; the key takeaway being – real estate ventures do not manage themselves and active, disciplined management is essential.
Our objective for How We Do Credit: Part II, is to provide investors with a basic framework for evaluating an asset’s location in the marketplace, as well as a fundamental understanding of the many factors that influence locational desirability, utility, and long-term value. Recognize first that what may be desirable, useful, and drive value to one asset may not have the same impact on another – which is why our credit guidelines are delineated by property type. That way, each property type is evaluated in accordance with its distinct features and characteristics required to be successful in its market.
While this piece is too short to cover all property types, and it is also too short to cover a comprehensive list of “what matters” for each of them, here’s a look into the main things we look for when considering the location of a property.
Commercial multifamily is a classification of housing comprised of five units or more.
Regardless of configuration, whether garden-style, mid-rise, or high-rise, the same locational requirements generally remain – adequate access to retail services including grocery stores, drugstores, and community shopping, with proximity to community services such as the fire department, police station, schools, and health care facilities is highly desired.
Consider further any new supply that may influence the subject property’s performance in a particular area. For example, a comparably priced and amenitized apartment building will likely compete for market share. Alternatively, look for new supply in other construction that may complement and be accretive to the subject property, such as retail, transportation, or attractive recreational projects.
Also assess market fundamentals as they relate to the subject property. If rent growth is rapidly outpacing income growth in the region, the subject property may soon not appeal to the local demographic. If a single major employer accounts for a significant portion of the property’s tenant base, the property may be overexposed to a particular industry. Generally, a diversified tenant roster with well-distributed lease expirations is preferred for multifamily assets. An investor should also be cognizant of the average cost of home ownership for the subject property’s target demographic to help ensure that long term leasing demand remains robust.
Industrial property is used for industrial purposes; i.e. manufacturing, distribution, warehousing, and is a broad category encompassing a variety of special uses and locational needs.
For example, a multi-tenant warehouse is typically a single-story “box”, “high-cube” or “bulk” building. These configurations require sufficient access to major thoroughfares, key local roads to relevant industrial and commercial centers, as well as clear paths of ingress and egress for trucks and oversized vehicles to accommodate storage and distribution.
Alternatively, “flex-space” (or flexible space) will typically include a higher office-to-warehouse ratio and combine one or more uses into a single facility, for instance, research and development, bio-technology, technology or light manufacturing, to facilitate lab work or engineering. In general, notwithstanding tenant specialization, industrial corridors are strategically located by preexisting infrastructure to support their use; e.g. railroads, ports, airports, and major roadways.
The facility should also be within reasonable proximity to any necessary labor force, material distributers, or complimentary businesses essential to the subject facility’s operation.
Retail properties provide goods and services to local neighborhoods and communities.
Categories include anchored, weak anchored, unanchored, single tenant, and multi-tenant retail centers, all of which should have ample visual exposure from adjacent streets, roadways, and major thoroughfares. The presence of left turn lanes, deceleration lanes, and traffic lights at entry and exit points is also highly preferred, with the ability to accommodate regular delivery truck ingress and egress.
Along with access, store frontage, depth, and overall building size should be appropriate for the market and intended use. Additionally, while exercise has its merits, relatively short, linear configurations are preferred to ensure comfortable walking distances between stores for patrons, while the availability and placement of parking should be commensurate with the use; e.g. restaurants and theatres typically require an above average parking ratio.
When conducting a site visit, our team prefers to evaluate any retail center during peak business hours to gauge circulation, efficiency, and further validate tenant sales and traffic counts.
Office properties provide a workplace for administrative and managerial staff, and are generally classified into two categories based on location – central business district (“CBD”) and suburban.
Variations include small professional, suburban garden, suburban mid or high rise, and CBD buildings. Office properties should be located in established business districts with adequate access to arterial transportation, food, banking, medical, and other retail facilities.
Look for industry concentrations and subsequent exposure in a particular market, like energy, technology, or automotive, that may impact the existing and future vitality of the local tenant pool. Additionally, traffic patterns, crime rates, proximity of housing, and the availability of educated labor are equally relevant considerations that can dictate an office location’s overall adequacy in a particular market.
Self-storage offers individuals and businesses the opportunity to store their non-essential items in a safe, dry environment that provides easy access without having to keep it either at their home or onsite at their business.
Self-storage facilities can provide the consumer with several options including drive-up units, climate controlled units, vehicle parking, and truck rentals. A self-storage facility should have adequate highway accessibility, security, and be configured for ease of ingress and egress for both passenger cars and tractor trailers.
Additionally, the position and nature of the area's residential concentrations, demographics, and traffic patterns should be assessed for the trade area, defined as any geographic area from which a property generates the majority of its business. As self-storage demand is commonly measured in terms of square feet per capita, it is also prudent to understand the nature of the local population, in terms of mobility (renters vs. owners) as well as income.
Manufactured homes are prefabricated and then permanently located in a Manufactured Housing Community (“MHC”). Manufactured homes range in price depending on size but generally offer a lower cost alternative than traditional residential construction. MHC’s are categorized based on a “star” system with 5 Star parks being the highest rated with amenity packages that include pools, tennis courts, and depending on the region of the country, access to golf courses and other recreational activities. 4 Star parks typically have less extensive amenity packages but have paved roads and curbs throughout.
Like traditional multifamily, MHC assets should be located in areas with adequate access to retail services including grocery stores, drugstores, and community shopping, and proximity to community services such as the fire department, police station, schools, and health facilities.
Again, no single employer should account for a significant portion of the property’s tenant base. Although the homes can be moved, it is atypical due to costs. Therefore, once a unit is in place within a community, lease turnover is typically low.
Location matters – and we make sure to visit the location of each property in which we invest.
Certainly, commercial real estate serves a number of different purposes – housing, manufacturing, storage, employment, recreation – meaning that the desirability, utility, and long-term value of any property is subject to its highest and best use, which in turn relies on the nearby infrastructure, market, and demographic composure, in other words its location. As these factors may change over time, and they typically do, investors and operators alike must regularly reevaluate their position in the marketplace and prepare to adapt.
At RealtyMogul, we aim to simplify real estate investing by arming our investors with the relevant market data, diligence, and performance tools necessary so that they too may perform independent analysis, frame insightful questions, and stress a sponsor’s investment thesis on every transaction they choose to pursue.
As with all investments, investors should evaluate each individual real estate opportunity to see which best fits his or her investment strategy, bearing in mind that real estate investments carry risks and do not guarantee a return of any sort. We invite you to learn more about our opportunities and process by contacting a member of our Investor Relations team here.