Commercial real estate for the most part is for investors who take the long view.
But, on occasion, it isn't. Sometimes a property that an investor meant to hold
for decades changes in value so quickly that owning it is like holding a lottery
ticket. When a building becomes a big winner that way, what the investor has is a windfall.
Forty years ago, the best windfalls locally happened on the fringes of Harvard
Square. There, dilapidated rent controlled buildings that were investors'
nightmares suddenly turned to gold when the university went looking for ways to
expand its campus. The university didn't and doesn't have powers of eminent
domain. The only way that it could expand was by overpaying, sometimes by wide
margins, for property that had become important to its plans.
Other large windfalls were in the Financial District in Boston, where parking
lots and declining Class C buildings were suddenly hot prospects as land, for
developers assembling sites for office towers.
Some of the largest windfalls of the last decade have been in the neighborhoods
of suburban MBTA stops. When the idea caught on that, from a planning viewpoint,
the best place for dense new housing was at transit stops, in order to take the
pressure off suburban "sprawl," any large site near an MBTA stop that could
accommodate a large, new apartment building quickly took on a level of value
that it never had had.
At Cambridgepark Drive near the Alewife Red Line stop, one-story manufacturing
buildings that had held their value steadily for decades suddenly increased in
value five- and ten-fold, to numbers like $20 million. What had been buildings
languishing in the industrial sector were suddenly prime sites for high-density
multi-family buildings. What made the sites valuable for apartments were things
that didn't matter much for industrial buildings: rapid transit access, big adjacent
open spaces with the Alewife Brook running through them, and a bicycle path to
Lexington or into the city.
Something similar happened at the place that's now called Brighton Landing.
There, a running shoe manufacturer with a vision set about transforming a 1960s
industrial district. Anyone riding past on the Mass. Pike now can see the result:
new office buildings, a practice ice rink for the Boston Bruins, bold architecture,
and a commuter rail stop. That vision has paid off for New Balance, for the city,
and - not least - for the former owners of the industrial buildings, whose holdings
took on a value much larger than their value in the industrial sector. The
windfall profits were what motivated them to give up the land.
A few investors saw Chelsea's potential to become the next Somerville - an
overlooked near-Boston suburb that in a short time could go from low end to
trendy and expensive. What investors might not have seen was that the turnaround
would happen more in Chelsea's old industrial district than in its residential
neighborhoods. Chelsea's industrial district offers what developers want: large
sites for multi-family buildings and hotels. As a result, land prices in Chelsea's
industrial district off the Revere Beach Parkway have increased by as much as
400% in a matter of two to three years.
Adjacent to Chelsea in Everett, a big and heavily contaminated riverfront site
surged in value. What it took to cause the surge was a change in state law to
allow casinos, a limitation on allowing one and only one near Boston, and a
prospective buyer who would prevail in the competition to win the one near-Boston
license. What investor could have foreseen that all the cards would turn up winners
for that site? But that is what happened. And who could have foreseen that the
windfall effect from the casino would spread to the entire neighborhood, where
repair garages and modest two families have suddenly become good places to build
Not every commercial real estate investment becomes a windfall. The tired store
block that an investor bought in 2000 will probably still be a tired store block
in 2025. Real estate has only a few windfalls. It also has a large majority of
properties and owners who get out of their real estate what they thought they would:
a steady stream of income and value that holds stable or grows over a period of decades.
But just as every Chinese take-out meal comes with a fortune cookie, so too every
commercial real estate investment comes with a windfall factor. Like lottery
tickets, most windfall factors fail to pay off. But sometimes, along comes the
windfall, out of the blue. Windfalls put the chance of a big payoff into every
commercial real estate investment.
For real estate appraisers, it is important to watch for new sources of value.
It is important to consider land value, especially in a "hot" market, when it is
the land that is suddenly where all the value is. Of course, appraisers need to
analyze a property as what it is - industrial, retail, office, or multi-family.
But appraisers also need be on the lookout for new uses that can transform a
neighborhood. Yesterday's comparable sales may be irrelevant if new uses have
arrived. A good appraiser has an eye on all this and isn't caught flat footed in
the midst of change.