Adaptive Reuse Project - Foch Street Property

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.

 The developer has asked that we evaluate the following specific questions:

-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 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

 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

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. 
 

 

Retail and office projects are being completed and successfully leased up around the immediate area. Across W 7^th 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.
 

                          nearby Montgomery Plaza redevelopment

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.
 

 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.
 

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

 There are a number of uses that could be considered for the Subject Property on Foch Street. Here are my recommendations:

-         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

Texas A&M Real Estate Center

Downtown Fort Worth, Inc.