Large private equity real estate firms often hold prominent buildings, from the Willis Tower to the Cosmopolitan Hotel in Las Vegas. But often the more lucrative commercial real estate investments are decidedly less obvious and less attractive.
At Origin, we have a unique ability to identify investment opportunities that aren’t necessarily “brochure quality” but offer headline-grabbing performance. Once identified, we unlock “trapped” value through targeted improvement plans that enhance the overall tenant experience, which, in turn, generates higher rents and ultimately increases property values.
This is known as a value-add strategy, and it involves strategic upgrades to a property’s physical condition, operations or capital structure. By using these three strategies, Origin has earned an average 28 percent annual return for investors since 2011.
1. Physical makeovers: Well-designed renovations make commercial real estate investments more experiential for tenants, or helps to reposition the building for new prospects. Often, office buildings need changes only to common areas and corridors, keeping tenants and their cash flow in place during renovations.
At Origin’s Denver Corporate Center I, a combination of fund and crowdfunded equity is being used to turn idle ground-floor and lower level square footage into attractive, collaborative spaces that will include newly exposed 14-foot-high ceilings, work and conference areas, an Internet café and a fitness center.
A property’s overlooked asset may be its surroundings. Repaved, expanded or sheltered parking often raises a site’s stature, as do activity areas. New amenities such as covered parking and an outdoor bocce court have allowed us to command premium rents in some of our properties.
In apartment complexes, a new manager and an infusion of capital for renovations can make the biggest impact. Upgrades to kitchens, bathrooms and common areas as well as increasing resident services have all proven to be successful strategies in past investments. For example, in Chicago’s Lux24, we relocated and expanded the fitness center, improved the rooftop patio and reconfigured floor plans to add five new units to the property, adding more than $1 million in value to the building.
2. Operations upgrades: Improving a commercial real estate investment’s management and marketing offers another path to fiscal success. Rents at a property may lag when compared against comparable properties. Perhaps maintenance has been neglected or marketing may have been ineffective. Shifts in the business climate or tenant base often go unnoticed and create prospects to create profit.
Also, a manager may not be the best option for a property. Some real estate investment firms are vertically integrated, meaning that they do the asset management and have an internal property management business. Yet they may not have the expertise to execute equally well in every market or on every business plan. For that reason, we prefer to hire best-in-class, third-party managers for each property.
3. Capital restructuring: Private equity can step in when partners’ strategies diverge and one owner may want to invest elsewhere, or disagrees with changes to a business plan. In these cases, Origin is uniquely positioned to buy out one of the investor’s ownership positions, a move called recapitalization.
At Denver Corporate Center I, Origin took over from an insurance company as a limited partner to help the operator pursue more ambitious goals, including improved amenities and adding additional development to the site.
Origin also steps in with timely capital investments when a commercial real estate investment is stabilizing its tenant base and new financing options are needed. An operator may want to renovate or repurpose a building to make it more desirable and drive rents higher. New capital also can help pay off debt to allow for new financing at more attractive terms, a strategy we have executed very successfully at a number of our investments.