You Take The Old, You Make It New

We seem to be a bit obsessed with the past when it comes to our entertainment.  Oz, The Great and Powerfula prequel of The Wizard of Oz, grossed almost $80m in North America in its first weekend, in spite of mediocre reviews.  Mark Hamill and Carrie Fisher are finalizing negotiations to reprise their roles as Luke Skywalker and Princess Leia in the upcoming Star Wars movies.  Steve Martin and Dan Aykroyd reprised their roles as Two Wild and Crazy Guys on Saturday Night Live recently and Larry Hagman's recent death warranted another Who Shot J.R. plot line on the new Dallas on TNT.  

Is it because we are out of good ideas?  Or is it easier and less expensive to retread old concepts?

In some ways we are seeing the same thing the New Jersey office market.  Older buildings are being purchased, many at significantly reduced prices, and given a new lobby and common areas.  All of a sudden, the landlord has a new story to tell, brokers have an excuse to revisit the building, and many times, because of the low basis, new tenants arrive.  KABR Group, one of my favorite clients, has purchased almost 3 million square feet in the last four years, mostly following this model.

Their first major success after entering the market was at 85 Challenger Road.  They bought the building vacant for at a deep discount and within six months, had signed a lease for 95% of the building with Samsung for their North American headquarters.  Others, convinced they were smarter than KABR, bought vacant buildings hoping to recreate that success.  Many failed, but some others had success.  Buildings in troubled markets like will still struggle to find tenants, irrespective of the price.

Just like every movie remake isn't a success (see last year's Total Recall), not every building purchased at a discount can be turned be turned around.  The fundamentals of real estate still apply, even with a low basis.  The building needs to be in a desirable market and have the infrastructure to accommodate today's tenants.  After Superstorm Sandy, tenants are paying greater attention to the reliability of power, back up generators, and connectivity.  Parking will continue to be a big concern as tenants seek a denser work environment.  If the building has good infrastructure, a good location, and a history of strong leasing, an owner with the right vision can likely recreate some of the old magic.

While buildings can be purchased for a fraction of the replacement cost and the vacancy looms in the area of 20%, we will continue to see buyers looking for value add opportunities.  Speculative buildings will continue to be few and far between, even with the success of buildings like MetroTop II in MetroPark.  After all, why come up with a new idea when you can just dust off an old one that worked in the past?

JN