As housing demand remains slack, builders are searching for alternate revenue sources until market conditions improve. A growing number of builders seem to be moving toward light commercial, as evidenced by the doubling of the membership in the NAHB’s Commercial Council last year.
Three builders whose companies generate income from commercial and rental properties they’ve developed told a large and attentive audience at the International Builders’ Show in January that this sector can be profitable and could be ripe for upgrading or transforming aging or closed retail centers.
The panelists—John Piazza, who owns the custom builder Piazza Construction in Mount Vernon, Wash., which has done commercial work for decades; Dick Rokes, a former Seattle-area condo builder whose portfolio now includes 14 mini-storage facilities, two retail strip centers, and a car wash; and Elton Parsons, a Kansas-based developer and consultant—shared timely advice on how builders might get started in commercial construction, finance those projects, market their services, and choose investment partners.
Builders should start small, advised the panelists. Piazza said he began by building a duplex a year, which evolved into building fourplexes and, more recently, a 200-unit office complex. He and Rokes recommend that builders retain ownership of some of their projects for rental income.
Parsons cited opportunities that include constructing medical complexes for cash-flush doctors, and schools for expanding smaller communities that the builder might lease back to the school district. Recently, he’s been fixing up and leasing back convenience stores, from which his projected payback is 36 months on the rehabs and 12 years on the purchases.
Financing is any commercial builder’s greatest challenge. Rokes, who started his own community bank, said builders must present banks with a compelling loan package steeped in details about the scope of the project and its anticipated return on investment. The panelists also seem to favor joint ventures. “People with land and money are rarely builders, and they are looking for your expertise to get their projects off the ground,” said Parsons.
“I’m a big fan of OPM,” said Piazza, as in Other People’s Money. Whenever his company gets involved with other partners, he asks for the creation of a limited liability company in which Piazza Construction owns 55 percent. This way, his construction company can manage the project and divert its liabilities to the LLC.
A builder in the audience asked Rokes, who has had success building and refurbishing strip malls, about getting into that sector when thousands of retail outlets are closing. Bloomberg.com recently quoted the retail consultant Davidowitz & Associates, which expects another 12,000 retail stores will shut down in 2009. Rokes sees an opportunity for turning lemons into lemonade. “There’s going to be a lot of retail that goes out of business and will need to be turned back into a vanilla shell” in order to be re-leased.
Rokes and Piazza also like the mini-storage business for alternate income. “Every builder here can build a mini-storage facility,” said Rokes, for which financing is “relatively easy” to obtain. Piazza said several of his tenants are running their businesses out of units in his mini-storage facility, with each paying $300 in monthly rent, excluding power. Mini storage isn’t recession proof, conceded Rokes, “but you can do fairly well in a recession with them.”
Learn more about markets featured in this article: Seattle, WA.