Windfalls

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 hotels?

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.