Today’s investment market is volatile, and investors know it. In this low-interest-rate environment, we believe real estate is an attractive asset class with the ability to provide yield — and with opportunities for significant growth for experienced investors that can identify and capitalize on them. We propose that one of these hidden opportunities is in an unheralded real estate metric: office parking.
Analyzing a property’s parking situation can help investors differentiate their portfolios and unlock value. There’s even more potential return in real estate markets such as the suburbs that aren’t as popular as they once were. Here are three reasons why.
The Modern-Day U.S. Is Crowded
Over time, the setup of the U.S. workplace environment has shifted from one office per worker to one cubicle per employee to now an open-plan office. Often framed as a progressive method to increase camaraderie and collaboration, it’s an easy, cheap way to squeeze more bodies into the same amount of space. In the 1980s and ’90s, architects designed office buildings with the idea that one employee would take up approximately 250 square feet. Thus parking was allotted at the ratio of four spots per thousand square feet. Today the need for greater efficiency has shrunk personal office space to anywhere from 80 to 125 square feet per person. Because suburban office properties are confined to a given amount of land, management can’t build out existing parking lots to accommodate the corresponding rise in demand. And expanding parking up — for example, a parking garage — is very expensive. This creates an opportunity for a real estate investor that can think creatively about solving that parking problem.
Now Is the Time to Buy Real Estate at Low Prices
U.S. Census studies have shown that Millennials aren’t moving to the suburbs in the same numbers as previous generations. That’s a relatively new trend that has left suburban office space very much out of favor. If you believe in reversion to the mean, however, this means there is opportunity in the repositioning, repurposing or reinvigorating of these traditional assets through creative solutions like building more parking. Ultimately, these assets can be converted into a finished product that creates a durable, stable income stream that’s attractive to tenants and investors. So if and when that reversion to the mean occurs and young professionals start gravitating back toward the suburbs, higher demand will spur greater return. Because these middle-market properties are currently out of favor, there’s less competition, lower cost of acquisition and greater potential profitability.
Parking Is Easy to Sell
In the office property landscape, there are thousands of generic buildings that are open for tenants, so pinpointing specific submarket needs and understanding individual asset-level potential is extremely important. For example, in the Dallas–Fort Worth metro area alone, there were nearly 11,000 office properties, containing 338 million square feet of space, at the end of 2014, according to CenterSquare’s research. A narrower search, focusing on office properties with one to three floors of 100,000 square feet of contiguous space — in line with demand by suburban high-density users at the time — revealed a property that lacked attractive parking. There was, however, an appended, unused industrial building that suggested the key to solving the parking problem and creating value at the asset level. Both properties were purchased at an attractive cost basis, and the industrial building was converted into covered parking — a feature at a premium in the unforgiving Texas climate. When renovations were completed, the complex had the highest ratio of parking spots per worker in its class. By addressing local needs and specific asset-level potential, the resulting asset competed in the market for office tenants with a completely unique advantage and was fully leased before construction was finished.
In today’s investment landscape finding a unique differentiator in positioning a real estate investment is critical to maximizing return. Managers need to dive down to the asset level to separate the winners from the losers. Parking configuration is just one of many approaches to that dive — one that we believe presents an opportunity for significant return. Real estate investors looking to capitalize on the corporate evolution of the U.S. and the suburban markets are missing a key differentiator if they aren’t looking in the parking lot.
Todd Briddell is CEO and CIO of CenterSquare Investment Management, an investment boutique of BNY Mellon that focuses on real assets, in Plymouth Meeting, Pennsylvania.
Any statements and opinions expressed are as of the date of publication, are subject to change as economic and market conditions dictate and do not necessarily represent the views of BNY Mellon.
