We’re all hearing it: despite many positive economic indicators, the commercial real estate world is buzzing with late-cycle concerns. For developers and those invested in development projects, this uncertainty affects investment strategy. In this market, project timelines are more important than ever, because a significant market shift during the development phase could threaten your income strategy, whether you intend to operate, sell or lease up your property. Compared to ground-up development projects, value-add projects, in the form of renovating, reusing or repositioning existing properties, are an appealing investment because they may be quicker to cash flow and therefore less vulnerable to market shifts. Additionally, as the future pricing of raw materials remains uncertain, reuse of existing properties may be a cheaper alternative to new construction. Given those advantages, it’s not surprising that over a third of respondents to a recent CBRE investor survey chose value-add as a preferred asset strategy for 2019.
But rehab and adaptive reuse projects come with their own set of risks, which must be managed properly if investors wish to capitalize on the redevelopment trend. With little room for error on the timing and financials of these projects, the rewards of redevelopment are only realized if the project maximizes budget and minimizes delays and risk.
To that end, I recommend four risk management strategies to make a value-add investment worth your time and money.