“Building Amenities that... Pay?”

It’s a multifamily developer’s dream -- A retail operator that juices the bottom line and simultaneously offers a service that residents actually want (and might even pay for)...

Look around in most cities and you’ll see beautiful new apartment buildings standing on newly built -- yet vacant -- retail spaces.  These spaces are typically raw shells with ugly signage, and occasionally alluring lifestyle imagery to show what could be… someday.  Or maybe never.

With ghost kitchens and deliveries of damn near anything at the touch of a button, not to mention Amazon’s earthly takeover, ground floor retail has seen better days.

As a developer-investor, we’re really looking at a spectrum of possible approaches to the retail conundrum.  And without a golden location, the strategic path is far from clear:  Do you sacrifice income potential and build amazing ground floor amenities that will attract tenants and drive rents?  Or do you risk it and seek an operator to add highly coveted income/value?  Finally, if you aim for a tenant, are you able to get one that residents actually want?  Does it even matter?

The first option, from our view, is a tough one.  Developers across the nation will occasionally engage in an arms race to add the hottest and splashiest (and surely unnecessary) amenities to their residential monstrosities.  Residents love to brag about them and they help with marketing, but do they actually create tangible value?  Does anyone actually use them?  

Just for fun, we looked up a few (in Miami and NYC, go figure) and we discovered on-call medical staff, sommeliers, IV drips stations, skate parks, and more!

With the right location, of course, retail is still alive and mostly doing just fine. Well positioned assets will have no problem attracting businesses that want to be close to its (mostly) well-heeled renters.  Larger developments are always at an advantage as they ensure that hundreds of potential customers will stroll past each day.  A healthy grab and go (like Sweetgreen) or a Whole Foods (total jackpot) is a game changer for everyone: developers, investors, and residents alike.

To the contrary, nobody wants an AT&T or another urgent care in their building.  But developers have to make a choice and most will side with the income generated with a longer term, NNN lease.  And who can blame them -- a Verizon Wireless shop is only marginally less ugly than a Retail Space For Lease sign, but at least it PAYS, right.

Fortunately, a third strategy exists under the right circumstances.  For smaller buildings (<100 doors) in less notable retail locations, you can minimize the capex spend on amenities and let the city do the work for you.  Why build gyms and restaurant space and skate parks when they are right down the street?  In many cases, residents are choosing to live in a building because they want to be in the city with all the amenities imaginable, only a short walk or ride away.  Plus, if your project’s construction costs are lower,  you may be able to pass on some savings to residents and undercut the competition.

At SCM, we’ve now invested in a couple of multifamily builds that used precisely this formula - modern units in a comparatively lightly amenitized property.  Rents fall marginally below nearby properties and our yields aren’t destroyed by the race to attract tenants.  Lease-ups are swift and occupancy rates are solid.  We like these characteristics a lot!

Our most recent investment opportunity in Denver at LOT28 in RiNo will follow a similar course (in Phase 2).  In the meantime, Phase 1 includes an adaptive reuse acquisition with operators that will pay AND continue to strengthen the area, an immediate value for our future residents, perhaps the icing on the cake!  Wish us luck and thanks for reading...

Brett P Holmes, Steel City Management LLC