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The owner of a property that suffers from obsolescence is faced with a variety of options.
July 01, 2007 -- Real estate obsolescence is an increasing problem. When we think of obsolescence in its usual sense, it is the natural result of a growing and changing society. It reflects functional depreciation, a property that became outmoded or excess because there was no demand for that type of space. Examples might be theatres, gas stations or bowling alleys, which while still used, suffered from a change in demand. In today's rapidly changing society, many newer buildings are found by their owners to be functionally obsolete while still new or even when just completed.
Obsolescence is also caused by economic and social depreciation, usually resulting from changes in neighborhoods, which makes the original use of property no longer suitable. An example would be an apartment property in an area that has become commercial.
The Choices
The owner of a property that suffers from obsolescence can handle it three ways. The building can be demolished to hold the land for future use; the building can be boarded up to "mothball" it until demand revives; or convert it to another use. Demolition or mothballing means an indefinite period of continuing losses. Conversion offers the possibility of renewing cash flow, but will require a new capital investment.
A Residential-Type Property
One type of property has successfully made a conversion in some locations. The residential-style commercial property or apartment property located in a commercial area can be in difficult financial condition. The solution can be conversion to the extended stay hotel.
Many conversion opportunities exist in downtown locations. The property must be located close to feeder business that attracts extended-day business travelers.
To attract the five-or-more-night guest, the hotel should provide the following: (1) studios and one and two bedroom suites that are larger than the standard hotel room; (2) a fully equipped kitchen; (3) a private outdoor entrance; and (4) at least a minimum amount of public space, including meeting rooms and restaurants.
One large hotel chain has a Residence Inn division, an extended stay lodging, and has plans to expand by conversion of nonhotel properties into its brand of residential hotels that primarily serve travelers staying for five or more nights. Rental or condominium apartment buildings as well as retirement communities are examples of the types of properties that might be suitable for conversion. That company estimates that 20% of its expansion goal will be met through conversion of nonhotel properties or the acquisition of hotels.
To date, most of these Inns are low-rise suburban properties near corporate developments and office parks, but the chain also operates high-rise hotels, converted from other uses.
Theatres
With modern multi-plex theatres being developed in malls, the older conventional theatre offers interesting possibilities in downtown and suburban areas. These buildings are usually well constructed and have that unobstructed interior space. Since the trend has been away from the downtown locations, the theatre can often be purchased at a bargain price.
In Louisville, Kentucky, an old movie theatre was converted to a 150-seat restaurant. Some of the success was attributable to some unique features of the theatre:
• Many local people had attended the theatre over many years and had formed a sentimental attachment to it that carried over to the restaurant.
• The 5,000 square feet was large enough for a good-sized restaurant. The theatre had a parking lot, a good downtown location and unique architectural features.
The theatre property was a perfect place for the conversion. When the seats were removed, the large open space was left. The area of the stage became an open kitchen. The lobby became a 50-seat bar.
The sloping floor of the theatre might be seen as a problem. In this location, the dining room was divided into three descending platforms, each one seating about 50 people. Dividing the area up also created a more intimate atmosphere.
Other examples of theatre conversions:
• A catering hall. The open interior can become one or more large-functional rooms.
• Apartment house. In one location, the theatre became a three-story apartment house after installing new floors and cutting windows into the walls.
• Commercial Building. Dividing the building space into two stories and making use of the basement for belowground stores or amusement facilities can convert the building to commercial use.
• Factory. The large open space and high ceilings of a theatre may be suited to light manufacturing.
Office and Bank Buildings
Bank buildings can be surplus because of bank mergers. Office buildings may be vacant because of the movement of some businesses to the suburbs. Because these properties usually are in excellent locations, they are candidates for conversion.
Office buildings that are designed for smaller tenants can be suitable for residential use because many of the office units approximate the size of apartments. They may not be suitable for industrial or warehouse use because the structural support for that use may be lacking.
The banks and thrifts often have large floor space like theatres. These can be easily converted to restaurant use, retail or a public facility. The high ceilings in banks can be appropriate for adding a mezzanine level to increase the amount of usable space. |
