My Blank Page
Last month I saw Bruce Springsteen performing his Broadway show (Covid vaccine card and masks required). At one point during the performance, Bruce recalls what life was like at 19 years of age. We all know that age is a time of transition. It is when we either begin our college years or embark into the workforce. It is the time when we leave our parent’s “nest”, we lease an apartment, we begin to taste both the joys and sorrows of adulthood, and we start to assume full responsibilities for our actions.
And I know this is not the time or place to be thinking about real estate investing, but you can’t always stop a creative thought from making a cameo appearance.
Midway through Springsteen’s performance, he describes being 19 as “my blank page.” He recalls it as the time when his story hadn’t been written yet. Everything on the horizon were possibilities, and every path taken would lead to a different road, a different journey and a different outcome. That uncertainty, he proclaimed, was both exhilarating and scary. Had he been born before recorded music had been invented, Bruce says he probably would have been a circus clown – always the performer. Fortunately, he was born after Thomas Edison invented the phonograph.
But it’s the possibilities of that “blank page” and the recognition that how one decision can impact another, which in turn affects yet another, that you start to see not only the “shades of grey” but develop deeper understandings and more wisdom. Much like throwing a small rock into still lake waters, the ripples emanate out from center in all directions.
You might be wondering how Springsteen could be connected to real estate investments. But when Bruce mentioned his “blank page” and the story it would someday tell, it made me recall the various questions that current investors and potential investors ask me, such as;
- How do we identify our opportunities?
- How do we envision the plan?
- How do we evaluate an investment’s potential?
- How do we test it to determine its validity?
And in pondering the answer to these questions, lies the connection. Because the answers will fill the “blank pages” that become our investment story and the plans to achieve our goals.
The Real Estate Investment Process
This process typically begins with the creative right side of our brains and the plan becomes the story on our “blank page”. It is the time when we evaluate what the property could become. What is it missing? What does it need to enhance its value? What options are there that are beyond what is directly in front of us – the ones that few people see (I refer to this as being able to see 6 when others only see 5). It is the most exhilarating and fun part of the investment modeling and analysis process because nothing has been written yet. Our ownership story and its direction are blank. All that lies in front of us are the potential assumptions about costs to purchase, expenses to implement a plan and the outcome, along with its projected returns. If one idea doesn’t produce the results we are seeking, then we throw out those pages and start with new blank ones. New ideas, new forecasts and new outcomes are then re-tested and evaluated. That iterative process continues until it either produces the desired result or we exhaust all feasible ideas.
On some occasions, during our evaluation process, nothing seems to work. The purchase price is too high, the costs to implement the plan too expensive, the projected benefits are not attractive, or our vision just isn’t clear enough. Since Kenwood seeks investors only when the right opportunity presents itself and without the blank pages being filled with concrete ideas and realistic projections, we move on to the next opportunity.
Once we begin to identify a promising idea, it then leads immediately to other possibilities, much like the concentric waves emanating from the rock hitting the water. We theorize and then test. For example,
- If we add amenities such as a fitness facility or conference center, will it lead to higher rents, or do we need to implement these amenities just to remain competitive?
- Are the interior finishes, suite sizes, and forecasted rents appropriate for the market and the property?
- Can vacant suites be re-configured to increase rents or decrease downtime?
- Should we construct speculative suites to capture tenants who need space immediately?
- What has the current owner been doing well and not so well?
- Can we improve the items they are not doing well?
If we can identify those solutions and develop a plan that produces attractive returns based on reasonable assumptions, then we know we can create value and it is prudent to move forward with the opportunity.
Well-known author and organizational psychologist Adam Grant wrote, “Creativity is the art of being kind to yourself when you’re generating ideas and tough on yourself when you’re evaluating them. Invite the inner cheerleader to the brainstorming party. Then call your inner critic to clean up the mess later.”
We’ve also learned through the years that once you have developed a vision and a plan, it is important not only to convey that plan to everyone on your team and to be singularly focused to achieve its goals, but also to be flexible within the plan’s framework to respond as facts or conditions change.
Let me provide you with some specific examples.
Edgeworth Drive, Capitol Heights, MD
In early 2004, when we initially toured and analyzed this 33,000 sf small bay warehouse building, occupancy was approximately 82%, the building’s exterior had no curb appeal, the roof and many of the mechanical units had exceeded their useful life, and many tenants were on month-to-month leases. When we evaluated this opportunity, we considered maintaining it as a rental income-producing property. However, to correct the necessary physical issues, would require approximately $560,000. We also estimated that it would take 18-24 months to stabilize the occupancy at 90+% and some existing tenants would need to be replaced.
We then developed an alternative strategy. These pages were filled with a plan to convert the building to warehouse condominiums. At the time, there were no other warehouse condos to compete with – an obvious plus. However, it also meant some uncertainty about the depth of the warehouse condo market and how many businesses would actually want to purchase their space.
Since there were no comps to rely on, we also had to estimate an appropriate purchase price per unit. Next, the capital projects would need to be accomplished quickly, before any units could be sold. Lastly, we needed to create the legal documents necessary for a condominium and secure state approval.
Ultimately, we decided to pursue the condominium strategy. The capital projects were completed and the condominium regime was approved within 6 months and we closed 4 units within the next 30 days. We achieved complete sell-out within twenty-five months and this investment produced a 66% internal rate of return (IRR) for our investors after all expenses and fees.
Preston Court, Jessup, MD
This 180,000 sf warehouse distribution project sits mid-way between Washington DC and Baltimore. When we initially reviewed the property in 2004, it was 30% vacant and had a large 40,000 sf suite that had been vacant for over 12 months. During our evaluation process, we spoke to many leasing agents about why the space had been a challenge to lease. Based on that discovery, we realized that the small truck court width was the primary issue because it could not accommodate a large volume of 53’ tractor-trailers and bigger tenants require frequent deliveries. Since enlarging the truck court was not feasible, we investigated the truck court requirements for smaller tenants.
We quickly learned that these users had far fewer needs for 53’ trailers. As a result, we determined that subdividing the larger suite into multiple smaller suites would be an effective solution. However, this also required new demising walls as well as new gas and electric services. These costs would need to be recouped through rental payments. Local brokers also informed us that smaller tenants would generally pay $1/sf more in rent. That information made all the pieces come together to fill our blank pages.
The outcome worked as planned. After purchasing the property and creating the smaller suites, it quickly became 100% occupied.
Ashton Road, Hanover, MD
The story for Ashton Road began at a lunch meeting where we learned that a new real estate operator had control of an attractive flex property for only $61/sf, but it was only 40% leased. They needed equity to acquire it, a seasoned sponsor to help secure a loan, and a property manager to operate it. Based on our experience, we knew immediately that the price and location were very attractive.
Within 4 hours, we not only completed our basic level underwriting model, but also submitted our interest to the newly formed operator. Ultimately, we analyzed the returns both short term – less than 5 years – and long term – 10 years plus after stabilizing the occupancy and then enjoying the cash flow. With this property, the short-term strategy produced significantly higher returns.
Within 39 months, we achieved 100% occupancy and listed the property for sale. Despite marketing and selling it during Covid, we exceeded our initial underwriting projections and our investors achieved a 24% IRR after all fees and expenses.
That Blank Page
So, the next time someone hands you an empty pad of paper, consider all the possibilities, all the potential futures, and all the outcomes that could fill that blank page.
Kenwood Management is always looking for new investors to join the Kenwood Community. Learn more about our investment services and how you can generate steady and secure commercial real estate gains with our team of experts.