No this is not a comp exam question, but maybe it should be…
We recently appraised a ±30,000 square foot, wood frame building that was originally constructed as a conventional L-shaped strip mall with 17 units. A few years after completion of construction, the entire building was leased to a national pharma credit tenant, who turned it into a fully climate controlled office warehouse/flex space/ manufacturing plant. The lease rate is consistent with other industrial/heavy commercial properties in the area. In-line retail space in the subject area is currently renting for twice the subject rent, or twice market rent for heavy commercial/industrial properties in the area. The subject is surrounded by both heavy commercial/industrial properties and strip malls, all of which are at stabilized occupancy. The subject is zone Mixed Use Commercial, which allows for most heavy commercial/light industrial property uses, as well as retail uses, as do the most of the surrounding zoning designations. Conversion to a strip mall would cost $50 per square foot.
Oh yeah and the subject lease is up in 5 years with no renewals. The current tenant wants to renew. The current tenant also trades at a very low cap rate.
What is the highest and best use of this property? Remember if you disagree with me it’s because you have the wrong answer!
Seriously though, highest and best use considerations on the Gulf Coast have become more challenging in the face of ever increasing land values, construction costs, and insurance premiums. Projections are very difficult in this economic climate, which creates uncertainty, and arguments against redevelopment carry more weight in when the benefit is less certain.
By: D. Parker Moring, Jr., MAI
