I’ve often heard the advice that we should look at our history in order to improve our future. There are so many great stories of things that have happened in the past, so I’ve decided to write a series of blog posts that take a look at the past, and then apply the lessons learned to commercial real estate in modern times. This should be a fun, educational and creative way to share CRE tips and advice. So, with no further ado, here goes my first post in the “CRE Lessons from History” series!
In the year 1892, Samuel Insull, left the General Electric company in Schenectady, NY and moved to Chicago to take over the Chicago Edison power company. At the time, electricity was too expensive for the common household and was confined to the homes of the most affluent people, business districts and department stores. “Catering to the few, and charging what the traffic would bear, was how the power producers in America saw the future.” Samuel Insull had the vision to see that if all households purchased power from his generating station that the cost could be dropped from 12 cents per Kilowatt/hour to 2 cents per kilowatt-hour.
Investing in income producing commercial real estate (NNN, Office, Hotel, Warehouse, multi-family) is not the same as generating and selling power. However, there is a tremendous lesson in what Samuel Insull demonstrated. Any time you are looking at a potential real estate investment, you have to be asking yourself one fundamental question:
Does the location and configuration of this building have a broad appeal; can the improvements be used by other users? One of the benefits of owning a warehouse is that they generally appeal to most other warehouse users. If you have low ceilings or poor traffic circulation, that can be a concern; but most warehouses are reusable. Triple net retail or restaurant investments on a great corner are hard to reproduce, and the existing improvements are not as big of a consideration; because the value of the land will soon outstrip the value of the improvements. Medical offices next to the regional hospital are a safe investment. However, if you are not near the hospital they are expensive to convert to an alternative office use. If the market does not have high barriers to entry, then you need to pay careful attention to replacement cost.
An author named Harold Evans once wrote that “By 1927 every third home in America had a radio, and two thirds had electricity and by 1929 Samuel Insull companies were supplying 1/8 of the nation’s electricity and gas power.” In the years of the Great Depression, Samuel Insull went on to lose everything, but the great lesson of looking at the entire market place, to evaluate a single property, is one that will serve you well when considering real estate investments for your portfolio.
About Francis Rentz- Francis, who is based in Tallahassee, Florida and is one of the founding members of SouthLand Commercial, has more than 20 years of experience and secured numerous transactions valued at more than $100 million. He specializes in commercial properties and land. Click here to view his full profile and listings, or if you would like to contact him, you can call him at 850-877-6000, or email him at [email protected]