Transitions - Best and Highest Use
The economics of real estate demand that an asset should operate at its best and highest use. Striving for this sometimes elusive goal can be the driving force behind a transition.
One used to think about hotels as iconic local landmark institutions, it was unthinkable that they would ever close or change names. Nowadays hotels, which have become commodities, change brands because with the investment of a PIP one can maybe drive a higher Revpar, or perhaps a more favorable management contract. Amazingly some suburban office parks have 20 year old hotels working on their third or fourth incarnation.
A downturn in the economy, a new highway interchange, a super mall, or metro stop in the wrong place, and suddenly one whole wing of a property becomes a dormitory for a rich local university. What of a condominium tower where the original apartment units values are inextricably tied to the halo of a hotel brand that is about to disappear. In one transition a local newspaper publisher asked me about rumors that the adjoining apartments would lose 15% of their value the day we transitioned the historic hotel. I told him not to worry that in their home country the incoming brand managed palaces for royalty.
Sometimes it can just be about the dirt and the air. When the land value and the vertical development rights become more valuable than the existing hotel then the compelling equation is to tear it down. I was the last General Manager of such a situation. We were operating a 500 room luxury hotel with great margins and cash flow. A half billion dollars later it was shuttered and torn down and became the world’s most expensive vacant lot. Today it has just topped off higher than the Empire State Building and is selling some of the most expensive apartments anywhere.
Some asset managers miss their window of opportunity as earlier hands have already been in the cookie jar and an encumbering oversized mortgage or onerous management agreement leave them on the shore watching the tide come in unable to make a play but for some the timing is right and they catch the perfect wave and ride it!
davidmalcolmgibbons@gmail.com
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The economics of real estate demand that an asset should operate at its best and highest use. Striving for this sometimes elusive goal can be the driving force behind a transition.
One used to think about hotels as iconic local landmark institutions, it was unthinkable that they would ever close or change names. Nowadays hotels, which have become commodities, change brands because with the investment of a PIP one can maybe drive a higher Revpar, or perhaps a more favorable management contract. Amazingly some suburban office parks have 20 year old hotels working on their third or fourth incarnation.
A downturn in the economy, a new highway interchange, a super mall, or metro stop in the wrong place, and suddenly one whole wing of a property becomes a dormitory for a rich local university. What of a condominium tower where the original apartment units values are inextricably tied to the halo of a hotel brand that is about to disappear. In one transition a local newspaper publisher asked me about rumors that the adjoining apartments would lose 15% of their value the day we transitioned the historic hotel. I told him not to worry that in their home country the incoming brand managed palaces for royalty.
Sometimes it can just be about the dirt and the air. When the land value and the vertical development rights become more valuable than the existing hotel then the compelling equation is to tear it down. I was the last General Manager of such a situation. We were operating a 500 room luxury hotel with great margins and cash flow. A half billion dollars later it was shuttered and torn down and became the world’s most expensive vacant lot. Today it has just topped off higher than the Empire State Building and is selling some of the most expensive apartments anywhere.
Some asset managers miss their window of opportunity as earlier hands have already been in the cookie jar and an encumbering oversized mortgage or onerous management agreement leave them on the shore watching the tide come in unable to make a play but for some the timing is right and they catch the perfect wave and ride it!
davidmalcolmgibbons@gmail.com
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