In order to help determine the best real estate development
decision, a developer has asked for outside assistance in evaluating their
project. As part of this analysis, I will review the site, regulatory, market
and financial implications of the potential project. The property is located at
821-945 and 1001-1059 Foch Street
in Fort Worth , Texas .
-What property type should this be developed as? Should it be mixed use?
-Should a building be demolished in order to create more parking to
allow different property uses on site?
-Should development be mothballed?
Site Analysis

The most important decision is related to the future of
Building 2. Building 2 is currently
vacant and causing a cash flow problem for the owners. This building was
originally built in 1948 and has not been renovated. There is 4300 square feet
of office space in the southeast side, which is opposite of the road frontage
on Foch Street and most
likely less desirable for potential tenants.
Evaluation of the condition of Building 2 should be conducted in order to estimate the remaining useful life of the structure. The building was constructed using cast in place concrete with a flat concrete roof. It was reported that the roof retains water, which could lead to leaks and escalating maintenance costs in the future. It is anticipated that there will continue to be capital costs associated with basic upkeep if the property is retained in the current condition. In addition, the dated look of the property will create a challenge when attempting to attract new tenants to fill the vacancy.
Market Analysis
Retail and office projects are being completed and
successfully leased up around the immediate area. Across W
7th Street to the East, Montgomery
Plaza was recently redeveloped and
now features several large and small national retailers, a variety of
restaurants, and condos priced from $210,000 to $1.2 million. Also, Cypress Equities recently completed a
project that was leased to a variety of high quality tenants including a movie
theater / restaurant and a local gym. In these projects, rent for retail space is
averaging $30-45/SF NNN. Office rents are averaging $25-26/SF NNN for spaces
larger than 100,000 SF. Rents at the subject property are currently averaging
$14.50/SF NNN, so newer projects are attracting a significant rent premium.
My concern with retail development for the Subject Property is the possibility that the area may not be able to support additional new retail with all of the recently completed projects. The developer would have to look hard to determine if the area could absorb any additional space that might be added at the Subject Property.
Financial Analysis
Based upon the site, market, and regulatory reviews, I believe that the current highest-and-best use of the property would be as a predominantly multifamily property. The desirability of the site location, the overwhelming positive economics of the overall multifamily sector and the recent new commercial developments in the area make this site prime for multifamily development. There would likely be some element of mixed-uses incorporated into the plans because of the city zoning requirements. Also, Building 1 is performing well enough to maintain in place as is, assuming that Buildings 2 and 3 would be large enough to support a multifamily property that could achieve the economies of scale needed for the new development.
There are two possible routes for adding new multifamily
development: adding a brand new structure or adaptively reusing the current
buildings. Although it could create a very interesting finished product, my
estimation is that adaptive reuse of the current building would be
prohibitively expensive. Not only would the developer need to spend a lot of
money to add all necessary fixtures to make the space suitable for residents,
they’d also need to repair any ongoing capital issues such as the roof and
exterior appearance. Also, adaptive reuse would only allow for one level of
apartments to be added, whereas a new development could be built with several
stories of rental units. Building 2 currently has 80,000 square feet of space,
which after adjusting for needed common areas in a residential space, could
probably support no more than 80 housing units depending on the size of the
units.
In my opinion, the best use of the site would be for a new
multifamily development. The land on which Building 2 is located is listed as
2.8260 acres or 123,101 square feet on the TCAD website. The land on which
Building 3 is located is listed as 3.533 acres or 153,903 square feet on the
TCAD website. According to the current zoning laws, there is no limit as to how
many units could be added to the property as long as ‘the project includes
office, eating and entertainment, and/or retail sales and service uses that
constitute at least 10 percent of the gross floor area.’ On the site of
Building 2 alone, it is estimated that a developer could install at least 300
multifamily units by building a dense 4 or more story building design.
Summary
T here are a number of uses that could be considered for the Subject
Property on Foch Street .
Here are my recommendations:
Texas A&M
Real Estate Center
Site Analysis
The Subject Property is comprised of three buildings totaling
approximately 162,300 square feet. Basic building information as of 1/1/11 is as follows:
Building
|
SF
|
Purchased Date
|
Redeveloped Date
|
Leased
|
Rents
|
1
|
68,000
|
2001
|
2002
|
60%
|
$14.50/SF NNN
|
2
|
80,000
|
2004
|
N/A
|
0%
|
N/A
|
3
|
14,300
|
2004
|
2005
|
100%
|
$14.50/SF NNN
|
162,300
|
Evaluation of the condition of Building 2 should be conducted in order to estimate the remaining useful life of the structure. The building was constructed using cast in place concrete with a flat concrete roof. It was reported that the roof retains water, which could lead to leaks and escalating maintenance costs in the future. It is anticipated that there will continue to be capital costs associated with basic upkeep if the property is retained in the current condition. In addition, the dated look of the property will create a challenge when attempting to attract new tenants to fill the vacancy.
Market Analysis
The subject property is located west of Downtown Fort Worth,
Texas between an area known as the Cultural District and the Downtown district.
There are several shops, restaurants, bars, and other attractions within close
proximity of the property. According to the website walkscore.com, the subject
property is in a location that is ‘Very Walkable,’ indicating the surrounding
area has a variety of amenities that can be easily reached on foot or through
public transport.
My concern with retail development for the Subject Property is the possibility that the area may not be able to support additional new retail with all of the recently completed projects. The developer would have to look hard to determine if the area could absorb any additional space that might be added at the Subject Property.
According to the developer, there were around 800
multifamily units for sale or rent within walking distance to the Subject
Property. Other multifamily projects in the area had leased up successfully.
The mixed use property directly adjacent to the Subject Property included 345
apartments that leased up immediately upon completion. Rents were around $1.40
- $1.50 for new apartments, which is on the high end of multifamily rents in Fort
Worth . With all of the new commercial and the close
proximity to Fort Worth cultural
centers and employment centers, this
seems like it would be an ideal multifamily development site.
Regulatory Analysis
The zoning for this property is listed as MU-2, which is ‘High-Intensity
Mixed Use.’ This zoning designation is designed to encourage high density
housing and to allow for a variety of other uses including various residential,
commercial, and light industrial applications. The MU-2 zoning allows for more
potential uses than virtually any zoning designation which allows for
flexibility for the developer or a potential buyer. With the MU-2 designation,
there are certain restrictions that need to be considered such as setbacks and
height restrictions. However, these regulations don’t seem to be prohibitive
when considering a variety of potential projects. It is important to note that
multifamily properties that would exceed 5 stories or 60 feet need to have at
least 10% commercial space included within the design. Current zoning allows
for an unlimited number of units, as long as 10% of the overall space of the project is dedicated to mixed-use commercial, retail or light industrial purposes.
The
surrounding area features several new developments which are generall zoned ‘PD
- Planned Development.’ According to
the City website, the ‘PD’ District is intended to provide for greater flexibility
in the development of residential, commercial, industrial, and institutional
uses. The PD is a useful tool for redevelopment by
providing a method to ensure that new land uses and their external effects such
as traffic, signage, and parking, are developed to minimize any potential
negative effects on adjacent properties.
The zoning for the subject and surrounding properties is
favorable for new development activities due to the flexibility allowed in the
current designations. It seems clear that the City of Fort
Worth is determined to turn this area into a
non-traditional (in Texas )
thriving residential and commercial district. Based upon the success of some of
the early projects in the area, it seems like this area is poised for continued
growth for a variety of uses.
Financial Analysis
Based upon the site, market, and regulatory reviews, I believe that the current highest-and-best use of the property would be as a predominantly multifamily property. The desirability of the site location, the overwhelming positive economics of the overall multifamily sector and the recent new commercial developments in the area make this site prime for multifamily development. There would likely be some element of mixed-uses incorporated into the plans because of the city zoning requirements. Also, Building 1 is performing well enough to maintain in place as is, assuming that Buildings 2 and 3 would be large enough to support a multifamily property that could achieve the economies of scale needed for the new development.
Construction costs for a property of this design would
likely be expensive, as in the range of $100,000 per unit or more. According to
the RS Means Construction Estimating site, a developer could expect to spend
around $101 per square foot for the property, assuming Concrete Block and Steel
construction of a six story building.
If the developer was unable to secure equity or debt for a
project of this magnitude, it is likely that the property could be sold to
accommodate a different multifamily developer that is interested in developing
in Fort Worth . With land trading at
$30/SF or more, the Building 2 land alone could earn nearly $4 million, with
the larger tract of Buildings 2 and 3 earning between $8.25 and 9 million from
a multifamily developer. Multifamily development is heating up, as the
economics of development appear to be favorable for the foreseeable future due
to tighter lending standards, population growth in Fort
Worth , and a larger number of people choosing to rent
in urban areas instead of attempting to purchase a home.
Summary
-
Building 1: Since Building 1 is
performing and has what seems to be a consistent and desirable tenant base, I
would recommend allowing this property to continuing operating in its current
condition. At some point in the future, it may be necessary to renovate the
property to attract higher rents and compete with new retail developments in
the area.
-
Building 2: Since repair and
renovation costs will continue to be a drain on cash flow, a major change is
needed. The property could be effectively used for multifamily rentals. It’s
possible that Building 2 could be adaptively reused for multifamily loft-style
rental space, but it’s more likely the space could be effectively used if
demolished and rebuilt. Rebuilding would allow for more sustainable, higher-density,
multi-level multifamily rentals. It’s anticipated that the property would lease
up quickly at rates above $1.50 due to the desirability of the area and the
favorable multifamily economics. If the developer was unable to undertake a
project of this magnitude, the property should be marketed for sale to another
multifamily developer.
-
Building 3: Since this property is
performing, this building should be allowed to perform in its current condition
unless the land was needed for the multifamily development project on the site
of Building 2 or if it could be packaged for sale with Building 2.
Sources
Developer feedback
RS Means Construction Estimating website -
www.reedconstructiondata.com/rsmeans
City of Fort Worth Zoning
commission
Downtown Fort Worth, Inc.