How much vacancy is reasonable?   Warehouse space and community growth…..

A lender representative called yesterday.  I’m assuming this was likely a review of a property with a delinquent loan.  The difference is the size of the property and questions.  I won’t identify the property, but it consisted partly of warehouse space and seemed to have an unusually low cap rate and unusually high vacancy.  After a few minutes, I realized he didn’t really want my opinion, but wanted to confirm his conclusions.

Projected population changes in Nassau County. Source: 5/3/2017

What is the cap rate and what would be a normal rate for warehouse space?  In a normal mini-storage or warehouse sale, I would think in the 7 to 8% range might be reasonable, but property and location can change.  Consider an area with warehouse space, but near development.  If zoning or roadways change, the best use for the property might now be office-warehouse, retail or complete redevelopment.   How old is the space?  Is it insulated and heated/cooled?   How is the area?   The conversation is difficult without walking the property, seeing income history, management history and considering changes coming nearby.  Even considering the coming growth and availability of similar sites is worthwhile.   Valuing, based only on income, leaves a lot on the table and is a poor service to an owner.

Considering this lender, they were looking at a property with an assumed value and their internal cap rate of 6.75%.  The problem was a high vacancy rate, around 30%, the lender didn’t understand and probably wouldn’t understand if they weren’t familiar with the area.  The coming growth will probably push rents higher for the location and vacancy will drop.  The road in front of the property has also been under construction for the last year.   These two changes alone might account for half the vacancy and push rents higher in the coming few years as growth improves demand and the road construction nears completion.   This property might appreciate quite a bit.   Without looking, talking with the property manager, walking the site or even having an exact location, I could see pieces a lender might overlook.

Growth usually creates demand and inflates market value.   Vacancy often drops and rents are at a premium.  It makes sense to think about every possible change with potential to change the value or marketability.  Something occurred to me after the conversation.  He spent his time talking about actual numbers and spent the time looking for unseen potential.   Lenders or appraisers want to prove what happened and justify, while brokers should spend time anticipating.    Growth can cover up a mistake, but planning for growth means anticipating a change in under-performing properties.



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